SC tells Vodafone to deposit Rs 2,500 cr in its tax appeal

The Supreme Court on Monday asked Vodafone International Holdings BV to deposit Rs 2,500 crore within three weeks and furnish a bank guarantee of Rs 8,500 crore within two months, in its ongoing tax appeal. The company, while agreeing to pay, might also be exploring an out-of-court settlement in the tax dispute.

Monday’s interim order will be followed by a full hearing on February 5. Passed by a bench headed by Chief Justice S H Kapadia, the order also restrains the revenue authorities from enforcing any order against the UK telecom giant.

Vodafone’s appeal is against a Bombay High Court order, which upheld an Rs 11,000-crore capital-gains tax demand slapped on the company by the income-tax authorities for its acquisition of shares in another telecom company, Hutchinson Essar.

“Vodafone is confident that there is no tax liability resulting from this transaction and all the tax and legal advice it has received remains consistent with this view,” the telecom operator said in a statement.

When asked whether Vodafone is looking at an out-of-court settlement on the tax case, the company said the Dutch government (Hutch’s assets were bought by Vodafone’s Dutch subsidiary) has entered into discussions with Vodafone. It has also initiated a formal process under a tax treaty with the government of India. Vodafone said the Dutch government’s intervention is a standard mechanism that can be invoked between countries to review tax matters.

The Netherlands, which is a popular tax shelter for individuals and companies, is known to have written to the Indian government to consider an out-of-court settlement through a mutual agreement procedure, alongside the court proceedings between the Indian revenue authority and Vodafone. The request will be considered by the Indian government and a decision taken according to the double-tax avoidance agreement between the two countries.

However, responding to the discussions between the two governments on the court proceedings, Mohan Parasaran, additional solicitor-general of India and counsel to the I-T department, said: “We will wait and see what call they take on this matter.”

"The court has accepted the I-T department's assessment of liability prima facie and has also taken into account, without prejudice, liability as projected by Vodafone, which is why it has been asked to pay Rs 2,500 crore," Parasaran added.

After hearing senior counsel Harish Salve, who argued for Vodafone, the court said if the case went in favour of Vodafone, the government would have to return the deposit with interest. Attorney General G E Vahanvati, who represented the government, had already agreed to this.

The court made it clear that the main question it would deal with at the final hearing would be the jurisdiction of the Indian tax authorities to demand capital-gains tax. Vodafone maintains the I-T department has no jurisdiction as the main agreements were signed abroad. Only a few downstream contracts were signed in India.

The Chief Justice said that the apportioning of liability with regard to the Indian content of the contract would also be a substantial issue before the court.