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Unit 1: Income Tax: Basic Framework

assets of the transaction between two or more offshore entities lies in India, it is subject Notes
to capital gains tax under relevant income tax laws in India. The Court invoked the nexus
rule wherein a state can tax by connecting a person sought to be taxed with the jurisdiction,
which seeks to tax. The treatment of the company as an Assessee in Default (AID) under
Section 201(1) of the Income Tax Act and reading Sections 5(2), 9(1) and 195, the court came
to the conclusion that Vodafone was liable to deduct tax at source (TDS). Vodafone has
now appealed before the Supreme Court to revisit the judgment, which makes them liable
for a record amount of ` 12,000 crores going to the tax authorities’ kitty.
Vodafone raises pertinent questions on the issue of taxation of non-resident entities. The
judgment will have direct impact on transactions of major acquisitions like SABMiller-
Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa

Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to pay tax
in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from
$6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability
could range between $868 million and $1.1 billion. The judgment would definitely throw a

cautious note to major investors and M&As in India; however, it does not have that great

an impact to curtail the investment flow to an emerging destination like India. The judicial

propriety of the case is still to be settled when the matter comes for final stages in the
Supreme Court. Going by the events in the lower courts, the Supreme Court is unlikely to
disturb the Bombay High Court ruling.
The global community is keenly watching the current trends happening in the Indian
subcontinent, especially since it has become an emerging player at the socio-economic and
political levels. United Nations Conference on Trade and Development (UNCTAD) has
reported that India is set to dislodge the US by December 2012 to become the second best
destination for FDIs, the major component of which is M&As. India is also set to revamp

its taxations norms with significant changes at the regulatory level. The proposed Direct
Tax Code contains key provisions, which will have a major impact on investments in
India. India has improved its rankings in the WB ‘Doing Business’ Report on the number
of regulatory changes taken in the existing year. This shows that the country is set to make
a global footprint by branding itself as a ‘Must Invest’ destination.
The Vodafone tax case has given India the opportunity to create a model for other countries,
which follow source-based taxation principles. It is an opportune time to bask in the glory
of India, which is said to have had one third share of the world market in ancient times, as
pointed out by economist Amartya Sen in his book The Argumentative Indian. Let’s hope
that we can revive the ‘Real India’ soon.
Questions:

1. Study and analyse the case.
2. Write down the case facts.
3. What do you infer from it?

Source: http://www.mindtext.org/view/89/Vodafone_Tax_case__A_Case_Study_for_Investments_in_India/

1.7 Summary

Every country generates income from ‘Income Tax’ in the form of direct tax levied by
government. Income tax plays a vital role in the economy of every country in the world.
Income tax act was enacted in the year 1961.
Income, in general, means a periodic monetary return which accrues or is expected to
accrue regularly from defi nite sources.

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