Ruling may set precedent for similar deals.
In a significant ruling that may result in $2 billion (Rs 10,000 crore) flowing into government coffers, the Bombay High Court dismissed a writ petition filed by telecom major Vodafone International Holdings BV challenging the Income Tax (I-T) Department’s jurisdiction to assess whether the over $11 billion Hutchison-Vodafone transaction was liable for capital gains tax.
Vodafone is likely to challenge the order in the Supreme Court. The high court has granted an eight-week stay, providing Vodafone time to appeal.
The ruling will have a bearing on at least half-a-dozen similar offshore deals in which one or both the companies concerned are not resident in India. The tax department has already conducted an exercise to identify such transactions, including some private equity deals, but will act on them only after a verdict in the Hutch-Vodafone case.
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, … 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.
Last year, Vodafone acquired the majority stake held by Hutch Telecommunications International Ltd (HTIL) in Indian mobile operator Hutchison-Essar (now Vodafone Essar) for around $11.2 billion.
After regulatory clearances were given, the tax department issued a show-cause notice to Vodafone under section 201 of the I-T Act saying the company did not deduct tax, estimated at around $2 billion, in the payment it made to HTIL.
In addition, the government decided to treat Vodafone as an agent of Hutch, a non-resident, under section 163 of the Act to recover tax dues.
Vodafone challenged the I-T department's jurisdiction to issue the notice. Vodafone lawyer Iqbal Chhagla argued that the I-T Act does not apply in this case since Vodafone is a Dutch company (registered in the Netherlands) and Hutchison is incorporated in the Cayman Islands. Chhagla also stated that a share purchase did not amount to transfer of capital assets, which could be taxed.
On its part, the tax department said the company whose shares were sold had operations in India and that it was an asset in India. “It is a case of transfer of assets and not just transfer of shares,” a tax official said.
In addition, he said, the deal was based on valuation of the Indian assets, for which Hutch also paid dividend. The source added that the benefits that accrued are in line with the definition in section 9 of the I-T Act that deals with income deemed to accrue or arise in India.
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 the money to the I-T department when it acquired HTIL's shares. Since the company had failed to do so, the I-T rule states that it is liable for the tax payment,” said G C Srivastava, a former tax officer who represented the government as a lawyer.
Terming the Bombay High Court ruling a victory, tax department officials said it will take a while before the amount can be recovered from Vodafone.
Once its jurisdiction is fully established, tax officials will start assessing the tax due from the transaction. Like any assessee, Vodafone will have the option to appeal against the assessment order with commissioner (appeals), then approach the income tax tribunal, a High Court and then the Supreme Court.
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June 21: Vodafone challenges govt tax rules
