The Vodafone decision, as expected, was appealed to the Supreme Court where the Attorney General reportedly wanted Vodafone to deposit 50 per cent of the tax demand of Rs 12,000 crore. For the time being, the Supreme Court had asked the apportionment to be done by the Income Tax Department before the question of stay could be decided. The case may be taken up for an early hearing in view of the enormous tax liability and the far-reaching consequences that the Bombay High Court decision may have for other acquisitions of business interests in India.
The recent decision of the Bombay High Court was the second round of litigation. The basic issue concerned the purchase of one share in a Cayman Islands company which, through more than 20 offshore companies, held indirect interest to the extent of more than 50 per cent in Hutchison Essar Ltd. (HEL). This overseas purchase of one share by a Vodafone company from a Hutch company resulted in Vodafone stepping into the shoes of Hutch in HEL. The name of the Indian joint venture company was then changed to Vodafone Essar Ltd. In the past, the Income Tax Department had never questioned such transfer of shares even where the consequence was the transfer of business interests in India.
Vodafone cited several decisions in its favour that had clearly held that even if all the shares of a company are purchased, it would not amount to acquiring assets of the undertaking. Shareholders are not the owners of a company's assets and even the purchase of a 100 per cent shareholding would not make the buyer of shares the "owner" of the company's assets.
Interestingly, under Section 29(1)(b) of the old Foreign Exchange Regulation Act, 1973, a non-resident could not acquire any part of an undertaking in India without the prior permission of the Reserve Bank of India. About 40 per cent of the shares of Shaw Wallace were held by four companies in the United Kingdom.
These shares were acquired by a Hong Kong company owned by the late Manu Chhabria and the agreement itself stated that the purchase of these shares would result in indirect control of 40 per cent of the share capital of Shaw Wallace in India. The Enforcement Directorate argued that the purchase of these shares resulted in acquisition or control of Shaw Wallace without the permission of the Reserve Bank of India. But the plea that such purchase of shares, in effect, amounted to acquiring the assets was rejected.