Vodafone appeals to SC against high court ruling

Vodafone has appealed against the decision of the Bombay high court on the jurisdiction of the Indian income-tax authorities over the deal in which UK-based Vodafone Group Plc bought a majority stake in Hutch Essar Ltd from Hutchison Telecommunications International Ltd in an offshore deal.

“Vodafone has filed an appeal with the Supreme Court in India today. The appeal challenges the recent high court judgement on the issue of jurisdiction," said a statement from a spokesperson at Vodafone. “Vodafone remains convinced that there is no tax to pay on the Hutchison transaction and we will continue to defend this position vigorously."

The deal involved the transfer of Hutchison’s majority interest in Indian company Hutch Essar to Vodafone in May 2007 for $11.206 billion. The Indian income tax authorities say the sale attracted capital gains tax and therefore, under the Income Tax Act, Vodafone should have deducted tax at source.

Vodafone is contesting the tax department’s stand as Hutchison held a majority interest in its Indian telecom company through a subsidiary located in the Cayman Islands called CGP, which had an issued share capital of $1. Hutchison sold CGP to Vodafone, which contested the Indian tax authorities right to tax the transaction as they felt the latter did not have jurisdiction over a Cayman Island sale, according to the existing tax law.

In September 2007, the tax department sent Vodafone a show cause notice asking why the company did not deduct tax at source. Vodafone approached the Bombay high court with a writ petition which was dismissed in December 2008.

Vodafone then approached the Supreme Court, which dismissed the company’s appeal in January 2009 and asked it go back to the tax department.

In October 2009, the tax department issued another show cause notice to Vodafone asking why the Cayman Island transaction did not fall within its jurisdiction. Vodafone filed two replies, one in January and another in March. After studying the replies, on 31 May, the tax department served an order on Vodafone saying it had the jurisdiction to tax the deal. Vodafone once again approached the Bombay high court.

The appeal to the Supreme Court comes after the Bombay high court passed a verdict on 8 September that partially upholds the positions of both sides. The verdict said that the tax department has jurisdiction over a part of the transaction and that the department has a right to tax assets located in India alone and not transfer of shares of a foreign company.

This would mean that the tax department has to unbundle the rights conferred by the shareholding and try to tax the part relevant to India. The verdict also said the tax department cannot pass final orders for two months, during which Vodafone could approach the Supreme Court.

shauvik.g@livemint.com

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