The Supreme Court on Friday struck down the income-tax department’s demand that the UK-based company Vodafone pay `12,000 crore capital gains tax for investments in India, saying any company registered outside the country can’t be taxed on FDI if paying tax in that country.
The judgment, the first of its kind on capital gains tax on FDI which apparently sent “positive” signals to foreign investors, said “FDI flows towards a location with a strong governance infrastructure, which includes enactment of laws and how well the legal system works”.
Two almost concurring verdicts by a three-judge bench comprising Chief Justice of India S.H. Kapadia and Justices K.S. Radhakrishnan and Swatanter Kumar also set aside the Bombay high court verdict upholding the I-T department’s notice to Vodafone for `12,000 crore capital gains tax.
The I-T department had claimed tax form Vodafone after it entered the Indian telecom sector through FDI, acquiring 52 per cent of Hutchison Essar and, prior to that, acquiring CGP Investment in the Netherlands.
“Applying the ‘look at’ test to ascertain the true nature and character of the transaction, we hold that the offshore transaction herein is a bona fide structured FDI investment into India which fell outside India’s territorial tax jurisdiction, hence not taxable,” CJI Kapadia and Justice Kumar said. Justice Radhakrishnan, in his separate verdict, concurring on almost all legal points, except on some minor issues, was harsher on the tax authorities, saying “capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed.” The top court directed the I-T department to refund within two months `2,500 crore deposited by the company as interim payment under the SC registry’s supervision with 4% interest. The I-T department was also directed to return Voda-fone’s bank guarantee.