HC to rule on taxation of Vodafone's take-over deal

The Bombay High Court will on August 4 hear Vodafone's plea challenging the I-T Department's tax claim of about $2 billion on the telecom firm's buyout of Hutchison's stake in Hutchison-Essar in 2007.

While the I-T Department has contended in an affidavit that the transaction was liable for tax payment in India, Vodafone International Holdings contended that both the seller and buyer were foreign companies and that the deal was made outside India.

The Netherlands-based Vodafone International Holdings bought Hutchison Telecommunications India Ltd's (HTIL) stake in Hutchison-Essar in 2007 for over $11 billion.

Vodafone submitted that in the past, similar transactions were not deemed eligible for taxation in India and that the Indian revenue authority was stating through the media that the transaction in issue was a "test case".

The I-T affidavit said that HTIL had made substantial gains through its investments in India, which were liable to be taxed under the provisions of the Income Tax Act, 1961.

HTIL held a 66.98 per cent direct and indirect interest in Hutchison Essar Ltd, which had telecommunication licences to operate in a number of telecom circles in India under the brand name Hutch. Following the takeover, the joint venture was renamed as Vodafone Essar Ltd and operates under the brand name Vodafone.
    
The I-T Department said it was correct in holding that Vodafone International Holdings was an assessee in default, as it had failed to deduct tax at source on the $11.20 billion payment made to HTIL on May 8, 2007.
    
The revenue authorities had sent an advisory through a letter dated March 23, 2007, communicating to Hutchison Essar Ltd and through them to Vodafone International Holdings that the transaction was liable to be taxed in India, Assistant Director of Income Tax N K Govila said in the affidavit.
    
Vodafone International Holdings, challenging the I-T letter, contended in its petition that there had been no transfer of any capital asset located in India since the share capital acquired by it was of a foreign company registered in the Cayman Islands (that is, HTIL).

Moreover, it said the transaction was negotiated and completed outside India.
    
Vodafone argued that the jurisdiction of the Income Tax department was not extra-territorial and as such could not be extended to encompass foreign entities transacting in assets outside India.
    
Vodafone said it purchased an asset, viz shareholding of a foreign company outside India, and was not the recipient of any income/receipt in India.
    
The proceedings, in the form of show-cause notices, were initiated against it on an ex facie erroneous premise that it was obliged to deduct tax at source although it was a foreign entity having no presence in India and thus entirely outside the purview of Income Tax Act, the telecom firm claimed.
    
After the Income Tax Department issued show-cause notices, Vodafone filed a petition in the Bombay High Court, which dismissed it on December 3, 2008, holding that the income received by HTIL was prima facie chargeable to tax in India.
    
Being aggrieved, Vodafone moved the Supreme Court, which also dismissed its special leave petition while holding that Vodafone should approach the Income Tax afresh to decide the preliminary issue whether the I-T Department had the jurisdiction to issue show-cause notices asking the company to pay tax in India.
    
The Supreme Court also allowed liberty to Vodafone International Holdings to move the Bombay High Court again if the Income Tax Department upheld that it had the jurisdiction to ask the company to pay tax.
    
As the Income Tax Department, after hearing the petitioner, decided it had the jurisdiction to levy tax, Vodafone moved the Bombay High Court, which will now decide the issue afresh.