The final hearing of the Rs 110 billion tax dispute between Vodafone and the Department of Income Tax (IT) has begun. Vodafone?s counsel, Harish Salve has told the Supreme Court that a penalty can be imposed only if the Indian Parliament frames a specific law to impose capital gains tax on such deals.
Salve added that the IT Department?s jurisdiction did not extend to it imposing the Rs 110 billion capital gains tax on the operator.
He also said that the transactions between both companies, Vodafone International Holding BV and Hutchison Communication International had taken place outside the country and so could not be taxed.
Further, it was contended that Vodafone was bound to pay tax on the deal in India only if it was proved that the transaction was a colorable exercise intended to evade the tax.
Salve further informed the Court bench that the IT Department, in its showcause notice to the company, had alleged that the transaction was colorable exercise. However, it later changed its stance before the Bombay High Court.
The case will resume on August 9.
In 2007, Vodafone had purchased 67 per cent stake in Hutchison of Hutchison Essar for over $11 billion. The IT Department has asked the company to pay about $2 billion, as it did not withhold capital gains tax while purchasing the stake.
The company, however, has been reiterating that the established tax laws were being re-interpreted in a new way and there were no previous examples of such taxes being imposed in India on an overseas share transfer such as this.
Vodafone also said that all the advice it received during and since the acquisition implied that there was no tax or penalty that had to be paid. The company added that it would take appropriate steps to defend itself and its investors.
After the Bombay High Court ruled in favour of the IT Department, the issue was placed before the Supreme Court in 2010. On November 15, 2010, the court had directed Vodafone to deposit Rs 25 billion, along with a bank guarantee worth Rs 85 billion.
Further on April 15, 2011, the Supreme Court requested Vodafone to appear before the IT Department. Thereafter, on March 23, 2011, the IT Department issued a notice to Vodafone, asking it to explain why a penalty equal to the tax liability should not be imposed on it and directed the company to be present before it on a specified date.
The IT Department had sought to penalise Vodafone International, the holding company of Vodafone Essar, for its failure to present Cayman Island income tax returns and certain other documents. The Department had asked for these documents between January and October 2009.
