Telecom major loses legal battle on tax claim; to move SC.
British telecom major Vodafone can no longer avoid the income-tax department’s call, with the Bombay High Court today dismissing its petition against a claim made by the revenue authorities.
Justices D Y Chandrachud and J P Devadhar rejected Vodafone’s appeal against a ruling by the tax department that it had a right to tax the UK firm’s acquisition of a majority stake in Hutchison Essar in 2007.
A few months ago, the I-T department sent a letter to Vodafone, pegging the tax claim at Rs 12,000 crore, which includes interest as well as penalty. The judges, however, asked the I-T department not to send a final notice to Vodafone for another eight weeks. Vodafone can also negotiate the extent of tax payable with the department.
Vodafone said it would appeal against the decision in the Supreme Court shortly. “We will be evaluating the order. We continue to believe strongly that this transaction is not taxable in India and will continue to defend our position,” Desmond Webb of the Vodafone Group told reporters. In a separate statement, Fereshte Sethna, a partner with Duttmenon Dunmorrsett, advocates for Vodafone, said: “The stand of the tax office has been upheld only to a limited extent.”
In 2007, Vodafone bought 67 per cent controlling stake in Hutchison Essar for around Rs 55,000 crore. The I-T department’s contention was that the company has to pay capital gains as the deal involved the transfer of an Indian asset.
Vodafone, however, has insisted that it wasn’t obligated to pay taxes or withhold any amount for the tax authorities because it bought the stake from CPG Ltd in a deal that took place on foreign soil. CPG is registered in the Cayman Islands in the Caribbean Sea and is owned by Hutchison Telecommunications International Ltd (HTIL).
Vodafone also appealed against the Indian tax department’s ruling that it had jurisdiction to tax the transaction. However, the court said, “It would be simplistic to assume that what was transferred was only a share of a company in Cayman Islands and that all the other rights were incidental to the transfer.” The acquisition of an interest in a joint venture does amount to the acquisition of a capital asset, the verdict stated.
For Vodafone, the ruling comes as a blow as it seeks to quickly justify its Indian investment. In May, the Vodafone Group — the world’s largest telecom firm by revenue — took an over Rs 16,000-crore impairment charge due to intense competition, but this didn’t include any provisions related to potential payments in the tax case.
The high court judgement could also open the floodgates of similar action against other such transactions. Similar demands have been made from companies like SABMiller, GE, and AT&T for their acquisitions in India over the past few years.
The case also sets a precedent for the Cairn-Vedanta deal. Edinburgh-based Cairn Energy is selling 40-51 per cent stake in Cairn India to London-listed Vedanta Resources for $6.65-8.48 billion. “Tax will be paid in both India and the UK,” a Cairn Energy spokesperson said. “Averaged across both countries on the gross proceeds, it will be in the low teens. What is paid will be determined eventually by the final proceeds.”
Depending on the final stake sale, Cairn’s combined tax liability in India and the UK could be between $868 million and $1.1 billion.
Commenting on the Vodafone case, Mohan Parasaran, additional solicitor-general of India, who also represented the I-T department in the case, said, “The target is an Indian asset and that was confirmed by the fact that dividend was distributed as a consequence of the sale to shareholders of HTIL and not the Cayman Islands company. This proves that it is not merely a share transfer, and has nexus with India.”
The court said for the price it paid, the company also received control premium, use and rights to the Hutch brand in India, a non-compete agreement, loan obligations and an entitlement to acquire, subject to Indian foreign investment rules.
H P Ranina, a senior Supreme Court lawyer, said the verdict was on expected lines. “The I-T department had a very strong case because most of the assets of Hutch that were transferred, were located in India and therefore taxable under the law,” he said.
Nishith Desai, an international tax lawyer and advisor to Vodafone, however, saw a silver lining in the verdict. According to him, the department can tax proceeds against income that “has sufficient nexus with the territory of India”. Therefore, aspects of the transaction such as sale of the offshore entity may be beyond the Indian tax net, he said, adding the court also accepted the principle of “form over substance and that taxpayers can plan their economic affairs under the provisions of law”.
Parasaran said that valuation will have to be done for the controlling interest, as well as Indian assets, and said the liability could be substantial because a major part of its earnings were from Indian assets.
Tax experts said that the court has taken a positive approach on the taxability of the transaction. “There are two parts to the taxation. While controlling interest, which is located elsewhere, is not taxed, the assets available in India will be taxed. How the bifurcation is made will be subject to further evaluation,” said Sudhir Kapadia, tax market leader at E&Y.
 JUSTICE DHANANJAYA Y CHANDRACHUDA Harvard-educated lawyer with a formidable reputation: very few of his judgements have been challenged in the Supreme Court. The former additional solicitor-general of India has fought several corporate cases, apart from socially relevant ones. He has also represented several public bodies, including RBI. He was appointed as additional judge of the Bombay High Court in March 2000. |
 JUSTICE JAIPRAKASH P DEVADHARHe is highly regarded for his knowledge of taxation issues. After joining as counsel for the Union of India in 1982, he specialised in service law, direct tax laws such as income-tax, wealth tax and gift tax, as well as Rent Act, Customs Act, and Excise Act. His other passions include social organisations like Chinmaya Mission. He was elevated to the High Court as additional judge in October 2001. |
