SC declines to intervene in Vodafone tax plea

Tax officials said they could expect to collect up to half the disputed amount ($1 billion) by March.

Vodafone was back to square one in its challenge to the assessment of capital gains tax on a stake it bought in Hutchison Essar in 2007 with the Supreme Court declining to intervene and asking it to first present its case before the tax authorities.

A Bench headed by Justice SB Sinha pointed out that Vodafone, the world’s largest wireless service provider, should approach the authorities and cooperate with them. It also asked Vodafone to submit a copy of the share purchase agreement to the tax authorities.

Tax officials said the department could expect to collect up to half ($1 billion or Rs 4,900 crore) of the disputed amount as a result of the apex court’s decision by March 2009.

The case relates to a tax demand that the tax authorities raised on Vodafone after it bought a controlling stake (67 per cent) in Hutchison Essar Ltd, India’s third largest mobile service provider, from Hong Kong-based Hutchison.

Vodafone acquired a company registered in Cayman Islands, a known tax-haven, for $11.2 billion. It contended the transaction involved two overseas entities and so the company was not liable to pay tax in India. The tax department rejected the contention and sent a notice saying the transaction related to assets in India.

Thereafter, Vodafone moved the Bombay High Court, which dismissed the petition on December 3 last year, after which the company appealed to the Supreme Court.

Today, the apex court pointed out that Vodafone had approached the Bombay High Court on the show-cause notice without waiting for the final assessment. Moreover, the company had not produced a copy of the agreement before the tax authorities or the high court.

The question of jurisdiction of the authorities to assess the tax related to contracts between foreign entities could be raised before the tax authorities, the judges said. If the company was dissatisfied with the order of the authorities, it could approach the high court again, they observed. If it was aggrieved by the high court order too, it could then approach the Supreme Court, said the Bench.