Vodafone International Holdings BV vs Union of India – Case Analysis


Tax is a vital component for any economy since it is the determinant of development for the country. Taxes are levied not only on individuals but also on companies and other corporate bodies. It is, therefore, necessary to have in place the best and most comprehensive laws and policies on taxation, so that the levy and collection of the same can be done with ease. It is also important that the tax-payer, along with the tax-collector, is well-versed with the laws on taxation so as to avoid any fraud. It is a right of the government to collect tax in order to pursue developmental goals, but at the same time, harassment and misery on part of the government just to collect taxes is not acceptable. In India, the Constitution gives the government powers in terms of collection of tax, not only prospectively but retrospectively as well, through required amendments. This provision in itself disputes the very basic characteristics of a tax – that a tax should be certain, i.e. a certain amount, and that the tax should be in continuity, and not abruptly collected at any given time. Retrospective collection of tax essentially signifies the collection of a tax by going back in time, that is, through past transactions. This goes against the nature of a tax, but there was an instance when the government of India amended the tax law and allowed for retrospective collection of taxes. The legislature attempted to distort a judgement of the Supreme Court in the infamous case of Vodafone International Holdings BV vs Union of India [1], to charge retrospective capital gains tax from certain companies. This move of the Indian government met with widespread criticism which ultimately led to the revocation of the practice of retrospective taxation. To understand how it took effect, it is important to first understand the case law involved within.

Facts of Vodafone International Holdings BV vs Union of India Case

The Indian government in the year 1999 introduced a new licensing regime, the New Telecom Policy, in lieu of the old one which directly benefitted telecommunication companies. It encouraged healthy competition in the market and allowed other companies to set up their networks in India. Owing to this, one company, namely Hutchison Telecom International Limited, set up a subsidiary company in India with the name of Hutchison Essar Limited. Hutchison Telecom International was the parent company and had a 67% stake in the subsidiary company it established. This stake was transferred to and controlled by a holding company of the Hutchison group, namely the CGP Investments Holdings Limited, situated in Cayman Islands.

However, in 2007, Hutchison decided to exit the Indian telecom market. At that time, another telecom giant, from the United Kingdom, Vodafone International Holdings, wanted to enter the Indian telecom sector. This prompted an agreement between the two companies, Hutchison and Vodafone, whereby it was agreed that CGP Investments would transfer the 67% stake it had in Hutchison Essar Limited to Vodafone International, the latter being a holding company of the Vodafone group in Netherlands. The transaction would result in Vodafone entering the Indian market and Hutchison receiving 11.1 billion dollars.

Since the companies were non-resident at the time of the transaction and the transaction itself took place outside India, it was believed that the Indian government would not charge capital gains tax from the transaction: a tax that would otherwise be levied had the companies been resident or the transaction taking place within the territory of India. Further, there was no existing law which stated that a company had to pay capital gains tax for a transaction involving assets taking place outside India.

When the said transaction came into the knowledge of the Indian government, the tax authorities issued a show-cause notice to the now existing company, Vodafone Essar Limited, under Sections 165, 201(A) and 201(1A) of the Income Tax Act, 1961. These sections put Vodafone Essar under the category of an assessee of Vodafone International, and also as an assessee-in-default because of failure to pay tax. Discontented with the move of the Indian government, Vodafone reached the Bombay High Court through a Special Leave Petition which challenged the jurisdiction of the tax being levied on it.

Bombay High Court’s Judgement on Vodafone International Holdings BV vs Union of India Case

The Bombay High Court ruled on the following points:

It observed that the transfer of shares between Hutchison International and Vodafone resulted in a transfer of controlling interest, which meant that the transfer is not merely that of shares but also of certain rights and entitlements.

These rights and entitlements fall within the scope of Section 2(14) of the Income Tax Act, which makes them capital assets.

The court also observed that even though the transaction took place between foreign companies outside the territory of India, the subject matter of the transfer is an Indian asset, therefore giving right to the Indian tax authorities to levy tax on the assessee.

The court went on to state that since there was an indirect transfer of an Indian asset and it resulted in an income from a business connection, the transaction also attracted section 9(1)(i) of the Income Tax Act.

The court held that in order to levy tax, there needs to be established a nexus between the transaction and the law. This nexus was established because the subject of the transaction was an Indian asset, and thus, Section 195 of the Act would also be applicable. This nexus, once established, can operate against non-residents and the Income Tax Act has extraterritorial operation.

Thus, the Bombay High Court dismissed the petition of Vodafone International and held that the Indian tax authorities had jurisdiction in the matter. However, the High court suggested that if the company could agitate before the tax authorities that it had reasonable cause that it was not liable to deduct tax at any given stage, the penal liability could be avoided. But Vodafone approached the Supreme Court of India against the order of the Bombay High Court.

Supreme Court’s Judgement on Vodafone International Holdings BV vs Union of India Case

As opposed to the position taken by the Bombay High Court, the Supreme Court of India stated that the transfer of assets and the transfer of controlling interest could not mean different things because they were a part of one transaction only. In fact, the transfer of controlling interest was an inherent part of the transfer of shares because controlling interest is not a property right but a mere contractual one which cannot be rendered taxable.

The Apex court also held that Section 195 of the Income Tax Act did not have extraterritorial jurisdiction and only applied to residents. As a result, this transaction did not have the nexus as stated by the Bombay High Court because the companies were foreign residents and the transaction took place outside India. Further, the scope of Section 9(1)(i) is limited to incomes arising from transactions involving a capital asset within India, and did not include indirect transfer of any capital asset. Moving on, the Court also stated that this act of Vodafone International Holdings was very much a move based on tax planning, just as other companies follow this arrangement for legitimate tax planning reasons. The Court determined on the doctrine of piercing the corporate veil, which holds liable a company when that corporate entity is involved in committing unlawful acts. On this point, the Court stated that this doctrine could only be applied when it stands proved that the transaction is a sham, unlike this transaction.

Therefore, the Supreme Court ruled in favour of Vodafone and held that the tax authorities had no authority to impose tax on the company.

The Finance Bill of 2012

In March 2012, the Indian government came out with a new finance bill, which sought to amend the existing tax regime and introduce retrospective taxation on any transaction involving shares of non-Indian companies being transferred to Indian holding companies, after 1962. The amendment changed all the sections involved in the Vodafone International Holdings Limited case to fit the purpose of levy and collection of retrospective taxes, and as a result, it nullified the Supreme Court’s judgement on the matter. The sole and baseless reason given for this amendment was to increase tax collection and benefit genuine taxpayers.

Faced with yet another challenge, the Vodafone International Holdings Limited BV moved to the permanent court of arbitration situated in The Hague, Netherlands, under Article 9 of the India-Netherlands Bilateral Investment Treaty. This Article allowed parties to move the permanent court of arbitration when disputes regarding investors of the contracting parties regarding an investment arose.

Permanent Court of Arbitration

Vodafone argued that the amendment for retrospective legislation violated the principles of equitable and fair treatment as mentioned in the treaty, under Article 4.1. It also argued that the government did not respect the decision of the apex court of the country and introduced such a legislation that would deliberately thwart that decision, thus creating an unstable and unpredictable business environment, which also was a violation of Article 4.1.

In 2014, Vodafone again initiated proceedings against India, this time under the India-United Kingdom Bilateral Investment Treaty. Even though the Indian government succeeded at getting an anti-arbitration injunction order by the High Court of Delhi, it was later dismissed on the ground that it was an abuse of process.

The Permanent Court of Arbitration delivered its award in favour of Vodafone International Holdings Limited BV, stating that the Indian government had violated Article 4.1 of the India-Netherlands BIT, and directed it to pay 5.5 million US dollars to Vodafone to compensate for legal costs.


Another day, another bill: the Indian government faced multiple defeats, both in their home country as well as internationally, which led it to come up with another Finance Bill in 2021, so that retrospective taxation could be removed from the economy. This time, however, amendments were done only in two sections, namely, 9(1)(i) and 119. The basis given for this bill was that earlier amendments invited a lot of criticism and affected the stakeholders negatively. This amendment waived the tax levied on Vodafone International Holdings Limited BV.

The above case highlights the ways a government can target companies and levy taxes through obstinate and negative measures. These practices hinder economic growth as well as degrade existing laws. The Supreme Court, in its judgment of the case, viewed that foreign direct investment flows towards a strong governance infrastructure with an effective and appropriate legal system. The rule of law implies certainty, and it forms the basis of any fiscal system. Retrospective taxation not only promotes uncertainty, but also affects foreign investments in a way that would hinders their flow. Retrospective taxation should only be introduced in the rarest of the rare cases, and only to either correct procedures or to protect the tax base.

Since the earliest of times, property has been regarded as an essential and inalienable right. And to boost economic growth, property rights must be strong, protective, and well-structured with efficient remedies. If one is not sure of the ownership regarding one’s own property, then it would be useless to spend on that property because ultimately someone else might benefit from that property.

The Vodafone International Holdings BV vs Union of India case is not alone; the way the government reacted to the situation has been seen before as well, in various cases involving FDIs. In cases like these, to save private ownership from encroaches of the state should be the stance of the courts, as displayed by the Supreme Court of India but not so much by the High Court of Bombay. Moreover, the Supreme Court of India being the highest judicial body, its decisions should be respected and abided by, instead of going against them. Finally, enactments that expressly go against fair dealings and showcase arbitrary powers of the state should be quashed.


What is retrospective taxation? What are its drawbacks?

Retrospective taxation means the collection of a tax by going back in time, i.e., through past transactions. Retrospective taxation exists but only in specific situations because it takes away the certainty and continuity factors of a tax. Its major drawback is that it goes against the very nature of a general tax because it is collected from a back date, thus breaking its continuity and also erasing the lines of certainty.

What was the main contention of Vodafone International Holdings Limited before the permanent court of arbitration?

The main contention put forward by Vodafone International Holdings was that the amendment for retrospective legislation violated the principles of equitable and fair treatment as mentioned in the treaty, under Article 4.1. It also argued that the government did not respect the decision of the apex court of the country and introduced such legislation that would deliberately thwart that decision, thus creating an unstable and unpredictable business environment, which also was a violation of Article 4.1.

How did the Finance Bills of 2012 and 2021 differ from one another?

While the finance bill of 2012 was introduced with the sole purpose of thwarting the judgement of the Supreme Court in the case of Vodafone International Holdings Limited by enhancing the scope of several sections in the Income Tax Act, the Finance Bill of 2021 revoked the retrospective taxation brought about by the Bill of 2012. The Bill of 2012 was uncalled for and a deliberate move of the government, whereas the bill of 2021 was introduced to tackle the criticism generated from the former bill.

[1] (2012) 6 SCC 613.

Zara Suhail Ahmed

Zahra is a student at Aligarh Muslim University, pursuing a 5-year B.A. LLB course. Currently in her 4th year, Zahra opted for Law after completing most part of her schooling from Cambridge School, New Delhi. Zahra has interned under a few lawyers and firms, participated in various moot courts and similar events, and is proficient in research and written content. A strong believer that education is the greatest virtue, Zahra seeks to learn from every platform and individual, whether working alone or as a team. Although Zahra is keenly interested to pursue ADR (Alternate Dispute Resolution) as a career, she has kept her options open and is interested in examining the different career prospects that her profession has to offer. Zahra has diversified interests apart from her professional life as well. Not only a successful lawyer, but she also aspires to become a productive human being.