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I'm really surprised to see no one has mentioned about the "Vodafone Essar Court Case" !!It is strongly believed that Our Supreme Court let a Massive Tax Evasion scam off the hook !!Before going into the case, lets know some facts that will helps us to understand better !Vodafone - UK based Telecom company.Hutch - Hong-Kong based company.Hutchison Essar Ltd. (HEL)- India based companyCGP Investments Holdings Ltd - Cayman Island based company, has 67% stakes in Hutch-Essar India.( CGP is owned by Hutch, Hong-Kong )Capital Gains Tax :Tax assessed on selling Capital Assets are called Capital Gains Tax – These may be Long Term Capital Gains - Assets sold after 36 months OrShort Term Capital Gains - Assets sold before 36 monthsShares of a company also come under Capital Gains Tax. But there is different time-duration for them (12 months)Here comes the story,December 2006: Hong KongHutchison Telecommunication International Ltd wanted to sell Hutchison Essar Limited (HEL).Instead of selling HEL directly, they decided to sell CGP Investments Holdings Ltd, located in Cayman ( CGP holds 67% in HEL (India) ). Since Cayman Island is a Tax Haven, they don’t have to pay Capital Gains Tax.Vodafone (UK) came forward and bought CGP holdings Ltd from Cayman Island ($ 11-billion). Vodafone (buyer) should have deducted that tax money from its total payment and paid the tax to Indian Government.March 2007, MumbaiIncome Tax Dept of India sent a notice to Vodafone to pay Rs. 12000 crores under capital gains tax since they bought an Indian Company HEL (Hutch Essar Ltd) for 11 billion dollars.But Vodafone refused to pay the tax and filed a writ petition in the Bombay High Court, challenging the jurisdiction of the tax authorities in the matter.It also renamed HEL (Hutchison Essar limited) to VEL (Vodafone Essar Limited)Sept 2010, BombayThe case was taken up by Bombay High Court. The court found that the vodafone's act was perceived to be mala fide and it directed them to pay the Capital Gains Tax.Vodafone again denied to pay the tax and subsequently filed an appeal to the Supreme-court.In Supreme Court, Vodafone argued that it only purchased CGP Investments Holdings Ltd (A Cayman Island company from Hutch Hongkong) .But Cayman Island company happens to have 67% shares of Hutch Essar ltd (HEL, India). And thus it only have “Shares” of HEL. It did not purchase any assets like trucks, buildings or mobile towers from the HEL (India).So where is the capital and where are the gains? It is an elementary principle of company law that ownership of shares in a company does not automatically mean ownership of the assets of the company.(For an example - an individual who owns 45 per cent share capital does not own 45 of that company’s assets. The assets belong to that company which is a separate legal entity.)Since it didn't receive any ‘Capital Asset’ from the Indian company, it cannot be taxed for capital gains!But IT Dept argued that, Vodafone purchased the shares of an Indian company. According to Indian law, capital gains tax applies to sell of shares!Vodafone defended that by saying, " This share-purchase took place in Cayman’s island, between two Non-Indian companies. They don’t have any capital gains tax there. So IT Dept can't hold them responsible for paying Capital Gains Tax in India.They also contended that IT Dept doesn’t have any jurisdiction over this matter!(For an example -Lets assume that ICICI Bank shares are listed in the US Stock exchange. As a US citizen, If anyone can own some shares.If they sell them and make a profit, should they be made liable to pay Capital Gains Tax in India, U.K. and other countries, where ICICI Bank holds Assets? )January 2012 SC Verdict:The Supreme Court ruled in Vodafone's favour in a landmark judgement. It said that the government cannot tax a deal between two foreign entities, even if the transaction includes an Indian asset.The demand of nearly 12,000 crore by way of capital gains tax, would amount to imposing capital punishment for capital investment, since it lacks authority of law and therefore stands squashed.And thus the Vodafone case has resulted in a loss of several thousands to the exchequer and the Supreme Court has blessed this massive tax evasion scam !!Finally Government amended the Income Tax Act Retrospectively and made sure that any company in similar circumstances is not able to avoid tax by operating out of tax heavens.Edit 1 :Some people have opined that it was merely a case of tax avoidance and supreme court followed the rule of the law.Well, One can easily understand that this was a convoluted transaction, and the Bombay High Court saw through the subterfuge.One wishes the apex court too had seen through the trick especially in the light of its own famous, landmark and salutary judgment in McDowell and Co Ltd’s case way back in 1985 -- “Tax planning should not degenerate into tax avoidance through subterfuges”Sources :Vodafone Wins Tax Case in IndiaVodafone wins transfer pricing tax dispute caseVodafone Essar Case: Capital Gains Tax Meaning, Reasons, Timeline, Implications, explained - MrunalImages: Google

Few things firstCentral government charges CGT i.e. Capital gains tax if you sell your property and make a profit on it ,As per taxation in India the person paying the money should pay the taxes first as TDS ( Tax deduction at source) and then pay remaining amount to seller.MNCs try several things to avoid such taxes.It is a common practice to open an intermediary company in tax heavens like Cayman and deal with them instead of dealing with real companies.FLASHBACK 2007 FebruaryHutchinson in Hong Kong had an intermediary company called CGP investment office at Cayman Island, this CGP investments had 67% shares of Hutch Essar India.Vodafone bought this company CGP investments they became head of Hutch Essar as well.VODAFONE ARGUMENTI have bought an intermediary company , I don't know what is inside it . It is outside government jurisdiction.PC argumentWhat was so special about CGP investment that you bought it for such a high value of 55k crores, it's value is derived from Indian assetsCase went to Bombay HCHC ruled that government is right , Vodafone should pay CGT which they avoided .Vodafone appealed to SCSC ruled that Vodafone is right , government should not ask for CGT from Vodafone.Certainly government was not happy , then Pranab Mukherjee clarified in IT act 2012 thatCGT will be payable outside India if it's value is derived from indian assets.To stop all such tax avoidance government announced GAAR during 2012 budgetGeneral Anti Avoidance Rules.It had a retrospective clause that government can ask for tax if any company had done such deals to avoid taxes in past. Certainly Vodafone is not the only one to have done such a deal , almost entire corporates started opposing GAAR .Later Shome Panel advised GAAR to be used under rare cases that too after 2016 .

Vodafone International Holdings vs Union of India. This ruling was awaited with bated breath and received with jubilation by taxpayers. I personally witnessed one of the hearings in the Supreme Court, and needless to say, it was one of my most memorable experiences.Vodafone (Netherlands) signed a Share Purchase Agreement with Hutchison (Hong Kong) for the transfer of a 'single' share of Hutchison's Cayman Island subsidiary. This subsidiary, through a complicated stream of downstream holdings woven through Mauritius and India, owned a 67% (52% direct + 15% indirect) controlling stake in Hutchison Essar Ltd in India. With the transfer of the Cayman Island company, the entire business of HEL in India got transferred to Vodafone.Vodafone argued that since the transfer of the Cayman company's share happened outside India, it should not be liable to pay capital gains tax here, since only transfer of capital assets situated in India would attract tax as per Section 9 of the Income Tax Act. The IT Department claimed that the 'substance' of the transaction was transfer of an Indian capital asset i.e. controlling stake in HEL, and hence, the 'form' ought to be ignored and the transaction ought to be taxed.The transaction was worth $ 11 billion and the tax liability was $ 2 bn, not including penalty and interest.Though the transaction would ordinarily be taxed in the hands of Hutch (being the seller), the Department went after Vodafone saying that they should have deducted tax and paid it to the Indian Government at the time of making the payment.The Bombay High Court ruled in favour of the Department, but the Supreme Court ruled unequivocally in Vodafone's favour. SC held that Section 9 does not cover 'indirect transfers' of assets in India in its present form, and if the Government wants to tax that, it should enact suitable legislation. The transaction had a legitimate commercial purpose, justifying its form, and hence, the form was to be respected. The commercial substance involved acquiring of call and put options owned by another Hutchison subsidiary (3 Global Services) which ensured transfer of both the direct and indirect shares to Vodafone. Any other route would not have transferred the indirect shareholding.SC reaffirmed the fine line between tax avoidance and tax planning, extensively discussing important principles laid down by the UK Courts in the cases of Westminster and Ramsay. These principles have been interpreted by Courts in various rulings, while adjudicating on tax planning.What is especially welcome about this judgment is its encouragement for FDI and call for stability.Most outrageously, the Government enacted retrospective amendments through Budget 2012 to UNDO this ruling. They caused such an uproar, that the Government then instituted a Committee to review them. It remains to be seen whether Vodafone is up for a Round 2 at the Supreme Court.Anybody looking to read more about the developments can click here - Faciendum