Bombay HC rejects Vodafone's petition against I-T dept

In a significant ruling which may result in $2 billion (Rs 10,000 crore) flowing into government coffers, the Bombay High Court has dismissed a writ petition filed by telecom major Vodafone International Holdings BV, challenging income tax (I-T) department’s jurisdiction to assess withholding tax Hutchison-Vodafone transaction.

Vodafone is likely to challenge the order in the Supreme Court. The High Court has granted an eight-week stay on the decision, providing Vodafone time to appeal.

The ruling will also have a bearing on a host of similar deals where one or both the companies are not residents of India. The tax department has already carried out an exercise to identify such transactions, including some private equity deals.

Last year, the I-T department had issued a show-cause notice seeking capital gains tax of around $2 billion from Vodafone.

The Vodafone had acquired the 67 per cent stake held by Hutch Telecommunications International in Indian GSM operator Hutchisson-Essar (now Vodafone Essar) for around $11.2 billion.

After all approvals were granted, the I-T department realised that it had missed out on collecting tax on the deal and issued a notice to Vodafone Essar seeking capital gains tax.

The I-T department held Vodafone liable because it expected the company to deduct capital gains tax while making payments to Hutchison Whampoa, the parent company of HTIL.

Dismissing the writ petition filed by Vodafone, a division bench of Justices S Radhakrishnan and Anand Nirgude ruled that the “assets located in India were transferred and the company (Vodafone) is liable for payment of the taxes”.

“The court said that Vodafone should have deducted the tax and paid to the I-T department during the time of the acquisition of Hutchinson Telecommunications International’s (HTIL) shares. As the company had failed to do so, I-T rule states that it is liable for the tax payment,” G C Srivastava, who represented the I-T department, told Business Standard.

Srivastava, a former Director-General International Taxation and Additional Solicitor General of India Mohan Parasaran had appeared for the I-T department.

Vodafone lawyer Iqbal Chhagla argued that the I-T Act does not apply in this case as Vodafone is a Dutch company (registered in the Netherlands) and Hutchisson is incorporated in Cayman Islands. Chhagla also stated that a share purchase did not amount to transfer of capital assets, which could be taxed.

In a press statement, Vodafone said: “The written order of the court is awaited. However, the court has extended the stay order for eight weeks, preventing the tax authority from proceeding in the case. This will also allow time for Vodafone to review the grounds of the court’s decision, once the written order is received, and file an appeal in the Supreme Court of India.”

“Vodafone, based on advice received, continues to believe that the transaction is not subject to tax in India and is confident of a positive outcome ultimately,” it added.