The war of words between the government and Vodafone intensified on Wednesday, with the finance ministry saying the UK-based telecom company was asked through Hutchison Essar Ltd (HEL) to provide for withholding tax on their $11-billion deal in 2007.
Finance Secretary R S Gujral had said in an interview with this newspaper on Monday that even before the transaction between Vodafone and Hutchison was completed, the companies were advised that the deal was liable to tax. A day later, Vodafone issued a statement that Gujral’s comments were completely untrue, as only Hutchison was contacted by the tax authorities prior to the closing of the transaction, but the communication did not give an indication that the authorities were re-interpreting the law.
Official letters exchanged between the tax department and HEL reviewed by Business Standard showed that in March 2007 the department wrote to the company, suggesting the Hong Kong-based Hutchison pay tax on capital gains from the sale of its stake in HEL to Vodafone. It was also said Vodafone was liable to deduct tax at source.
| SEQUENCE OF EVENTS Mar 23, 2007 I-T dept writes to HEL, informing it of Hutchison’s tax liability in Vodafone deal Apr 5, 2007 HEL says transaction between two non-resident entities was not liable to tax May 8, 2007 Vodafone paid consideration for buying Indian operations of Hutchison Sept 19, 2007 Showcause notice sent to Vodafone, asking why it failed to pay withholding tax |
“You are requested to impress upon Hutchison Telecommunica-tions International Ltd/Hutchison Telecom Group to discharge their tax liability on the gains made so immediately after the transaction is completed and before they cease to have any operation in India,” read the letter sent to HEL.
In its response in April 2007, HEL said it had “provided copies of this letter to the concerned parties” on the request of the ministry. The company maintained there was no sale of shares in HEL by any entity, so there could be no tax incidence in India and no question of deducting tax at source under Section 195 of the Income Tax Act.
The parties concerned included Vodafone, officials asserted. Vodafone did not respond to an email query.
In May 2007, Vodafone went ahead and made the payment to Hutchison. When it came to the knowledge of the department, a notice was sent to the company in September 2007 under Section 201 of the Act, asking the company why it should not be treated as an assessee in default for failure to withhold tax.
Thereafter, Vodafone and the government fought a long legal battle. The tax department won the case in the Bombay high court. Ultimately when the Supreme Court ruled in favour of the company, the finance ministry proposed retrospective amendments in the Income Tax Act to provide clarity on taxation in such deals. The tax demand on Vodafone is now likely to be restored and may exceed Rs 20,000 crore, including penalty and interest of Rs 7,900 crore and Rs 4,500 crore, respectively.
