The income-tax (I-T) department on Monday served an order on Vodafone International Holdings BV, claiming it had the authority to levy a withholding tax on the telecom firm’s $11.2 billion (Rs52,080 crore) deal to buy a majority stake in erstwhile Hutchison Essar Ltd.
Vodafone International, a unit of the UK-based Vodafone Group Plc, acquired the stake from Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa Ltd in 2007.
According to a senior I-T official, who did not want to be named, the order claimed jurisdiction over the deal, but did not quantify a tax liability. A spokesperson for Vodafone confirmed the company had received a notice from the tax department, but was not in a position to disclose details.
According to the tax official, the order was issued under Section 201 (1) and 1A of the Income-Tax Act dealing with the consequences of failure to deduct or pay withholding tax.
“Now, this will allow Vodafone to approach the high court to determine if the jurisdiction is right in law or not,” said Sudhir Kapadia, partner at audit and consultancy firm Ernst and Young.
The order was an outcome of the I-T department’s second attempt to to bring the Vodafone-Hutchison deal into the tax net. The attempt started in October 2009, when I-T department issued a show-cause notice asking why Indian authorities did not have the jurisdictional right to tax the firm.
The sequence of the second attempt to tax Vodafone mirrored the first in 2007, which started when the tax department issued a show-cause notice to the firm.
Vodafone bought a 67% stake in Hutchison Essar, since renamed Vodafone Essar Ltd. Hutchison Whampoa controlled its Indian subsidiary through a web of companies that finally led to a Cayman Islands-registered firm which was bought by Vodafone.
The tax department said the Cayman Islands transaction was essentially a transfer of an Indian asset and that Vodafone should have deducted tax at source when it paid Hutchison. After receiving the show-cause notice in 2007, the company approached the Bombay high court.