The Supreme Court on Friday set aside the demand of the Indian tax authorities asking the Netherlands-based holding company of Vodafone to pay capital gains tax to the tune of over Rs. 11,000 cr. on a 2007 offshore transaction in the purchase of a Cayman Islands-based minority shareholder in Hutch-Essar.

The offshore transaction, which gave the Vodafone holding company a 67 per cent stake in Hutch-Essar, was a bonafide, structured foreign direct investment (FDI) into India, held a three-judge Bench of Chief Justice S.H. Kapadia and Justices K.S. Radhakrishnan and Swantantar Kumar.

“The offshore transaction evidences participative investment, not a sham or tax avoidant pre-ordained transaction. It is between a Cayman Islands company and a company incorporated in Netherlands. The subject matter was the transfer of a company incorporated in Cayman Islands. Consequently, Indian tax authorities had no territorial tax jurisdiction to tax the offshore transaction,” the Bench said.

The Bench held that both Vodafone and Hutch were not “fly by night” operators or short-term investors and had contributed substantially — Rs. 20,242 crore — to the exchequer between 2002-3 and 2010-11, both by way of direct and indirect taxes.

Vodafone International Holdings BV, a company resident for tax purposes in the Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd. (CGP) a company resident for tax purposes in Cayman Islands on Feb 11, 2007.

Revenue authorities claimed that this would give the Netherlands-based company a 67 per cent controlling interest in Hutch-Essar, a company resident for tax purposes in India. However, Vodafone disputed this saying that it only controlled a 67 per cent interest, but not controlling interest, in Hutchison Essar Limited.

According to Vodafone it was asked by the IT department in October 2010, to pay Rs. 11,217 crore towards capital gains tax. After the Bombay High Court upheld the demand, the company filed an appeal in the Supreme Court.