Vodafone challenges Bombay High Court tax ruling, moves to Supreme Court

The dispute between Vodafone and the Indian tax department cropped up with the latter issuing a notice to Vodafone claiming capital gains tax for its purchase of Hutchison Telecom International (HTIL) 67 per cent stake in Hutch Essar for Rs 550 billion in 2007.

“The appeal challenges the recent High Court judgement on the issue of jurisdiction. Vodafone remains convinced that there is no tax to pay on the Hutchison transaction and we will continue to defend this position vigorously,noted a company statement.

Vodafone argument is based on the fact that the deal was done by two foreign entities: CGP Investments (Holdings) Ltd — incorporated by Hutchison in the Cayman Islands, and Vodafone International Holdings BV, situated in Netherlands. Since the stake sale and purchase were done in foreign lands, it is not to be taxed in India.

Moreover, the existing tax norms do not specify that such transactions are taxable, unlike the Direct Tax Code which will be applicable from April 2012. The I-T Department however stated when it first issued a show cause notice to Vodafone in 2007, that Vodafone should have withheld tax when it cleared payments to Hutchison.

Besides, the company is liable to capital gain tax as all the operating assets of Hutchison that were transferred, are located in India and taxable under the Indian law. The estimated tax liability on the transaction is $2 billion.

While the High Court judgement stated that the I-T department had the jurisdiction to claim capital gains tax as at least part of the transaction has direct linkage to India, it did not specify the amount of tax due. The he HC verdict on jurisdiction holds significance on two counts, one it gives the tax department jurisdiction in cross-border deals and secondly it will set a precedent for foreign firms planning to buy into Indian companies.