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SC connects with Vodafone, hopes soar for other MNCs

UK telecom major wins Rs 11,000-cr tax battle govt may amend law prospectively

BS Reporters  |  New Delhi/ Mumbai 

UK telecom major wins Rs 11,000-cr tax battle; govt may amend law prospectively.

Senior advocate Harish Salve was grinning from ear to ear before appearing in front of TV cameras this afternoon. The Vodafone counsel had enough reasons to feel happy: After nearly five years, the UK telecom major had on Friday won the Rs 11,000-crore legal battle with the Income Tax Department over payment of tax made to Hutchison Telecom.

While settling the dispute, the three-judge Supreme Court Bench, headed by Chief Justice S H Kapadia, also raised hope among a host of multinationals facing similar tax demands from the government. At least eight other companies, including AT&T, SAB Miller, GE, Cadbury, Sanofi and Vedanta, are involved in similar cases.

The tax department is keeping its cards close to its chest. While Central Board of Direct Taxes Chairman M C Joshi told Business Standard the government would examine the judgment before deciding a future course of action, a finance ministry official said the only option available with the government at this point was seeking review of the judgment.(Click here for graphics)

Some experts said the legal precedent may be short-lived. The Direct Taxes Code (DTC), due to be implemented in 2013, has provisions designed to make transactions similar to Vodafone’s liable to be taxed. Sandeep Ladda, executive director, PwC India, said, even as the judgment settled a prolonged litigation, DTC contained a proposal to tax similar transactions. “So, this ruling may have limited relevance after implementation of DTC,” he added.

For the moment, however, all is well. The Supreme Court said the government could not seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets in 2007, because the transaction took place between foreign companies. The court also directed the government to return the Rs 2,500-crore deposit that Vodafone made on the contested tax bill, plus four per cent interest.

The decision ends the uncertainty whether investors based outside the country could use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in one of its fastest-growing mobile-phone markets, had said the case was one of the key issues that had to be resolved in the region before the company could consider publicly listing its local unit.

Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd, a Cayman Islands holding company controlled by Hong Kong-based Hutchison, and maintained that since the share transfer was carried outside India, authorities here had no jurisdiction to tax its deals.

However, the tax department in September 2007 sought capital gains tax, saying Vodafone should have withheld that amount from its payment to Hutchison. But the apex court on Friday ruled that “such imposition of tax amounts to capital punishment on capital investments”. Vodafone Group CEO Vittorio Colao said: “We are a committed long-term investor in India and we have made it clear all along that we have faith in the Indian judicial system.” He said the company would continue to grow its Indian business, including making significant investments. Vodafone stock rose 1.60 per cent till the time of going to the press on the London Stock Exchange.

The Bombay High Court had ruled in December 2008 against Vodafone’s challenge of the tax bill. The carrier’s appeal to the Supreme Court was dismissed in January 2009. At that time, the Supreme Court had allowed Vodafone to present its challenge over the jurisdiction of the transaction to the tax department.

Experts said the judgment would give a major boost to foreign investors looking at buying out stakes in Indian companies. Hemant Joshi, partner, Deloitte Haskins & Sells, said the telecom sector had been plagued by various uncertainties. With this decision, a strong signal goes out to investors regarding the predictability and certainty of tax laws in the country.

Nishith Desai, the head of Nishith Desai and Associates, an international law firm, said the freedom to go ahead with such transactions had now been established. “It makes a lot of difference. We spend around 25-30 per cent of our deal-making time in negotiating tax indemnities. Now, that will come down,” he said

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First Published: Sat, January 21 2012. 00:21 IST