Revenue Wins a Major Tax Battle in Mumbai High Court
THE multi billion dollar tax dispute between Vodafone International Holdings B.V. and Income Tax Department which witnessed a see-saw battle of wits between the assessee and the tax authorities in multiple round of litigations finally culminated in the Apex Court directing the Assessing Officer by way of a remand to pass an order on the issue of jurisdiction and nexus for deducting tax at source in India. The Assessing Officer passed the order in favour of the Revenue. Against this order of the AO, the assessee again filed a Writ Petition in the Mumbai High Court challenging the locus standi of the Indian tax authorities to deduct tax at source on what the assessee contended as a transfer of shareholding of one foreign entity by another foreign entity for a consideration, with no nexus to Indian territory and hence no scope for deduction of tax at source in India.
After deliberating extensively on various submissions made by legal luminaries from both sides, the Mumbai High Court observed, “From the perspective of Income Tax Law what is relevant is the place from which or the source from which the profits or gains have generated or have accrued or arisen to the seller. The income accrued and arose and was derived as a consequence of the divestment of HTIL's interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HTIL's interests which comprises in itself various facets or components which include a transfer of interests in different group entities.”
As regards deduction of tax under section 195, the High Court observed, “the provisions of Section 195 of the Income Tax Act, 1961 are in the nature of a machinery provision enacted in order to effectuate the collection and recovery of tax. Given a sufficient territorial connection or nexus between the person sought to be charged and the country seeking to tax him, income tax may extend to that person in respect of his foreign income. The connection can be based on residence or business connection within the taxing State or the situation within the State of an asset or source of income from which the taxable income is derived. Once the nexus is shown to exist, the provisions of Section 195 would operate. Even though the revenue laws of a country may not be enforceable in another, that does not imply that the Courts of a country shall not enforce the law against the residents of another within their own territories.”
On the matter of jurisdiction of Indian tax authorities, the High Court observed, “In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The Petitioner by the diverse agreements that it entered into has a nexus with Indian jurisdiction. In these circumstances, the proceedings which have been initiated by the Income Tax Authorities cannot be held to lack jurisdiction.”
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