New Delhi: The Supreme Court on Monday asked Vodafone International Holdings BV to deposit a “security tax” of Rs2,500 crore within three weeks and furnish a bank guarantee for Rs8,500 crore from a nationalized bank within eight weeks pending the resolution of its tax appeal.
The case relates to the $11.2 billion Rs50,512 crore today) acquisition of Hutchison Telecom International Ltd’s stake in a Cayman Islands company, by virtue of which Vodafone entered the Indian market.
Vodafone has to deposit the security with the registrar general of the Supreme Court and, in the event of the telco winning its appeal, it will be returned with interest at the rate determined by the court.
Vodafone was asked to pay Rs11,218 crore in taxes bythe Indian income-tax (I-T) authorities on 22 October, which the company opposes on the ground that the deal doesn’t come under their jurisdiction.
“Vodafone is confident that there is no tax liability resulting from this transaction and all the tax and legal advice it has received remains consistent with this view,” said an unnamed company spokesperson in an emailed press release.
On 8 September, the Bombay high court ruled that the I-T department had the jurisdiction to tax certain underlying economic interests held in India that were transferred from Hutchison to Vodafone. However, due to the complex nature of the transaction, it has thus far been difficult for the tax authorities and independent firms to assess Vodafone’s true liability, if any.
Attorney general Goolam E. Vahanvati, who appeared for the tax department in the hearing, told the court that the department’s assessing officer had determined that Vodafone ought to deposit Rs3,500 crore, based on the basic tax liability of around Rs7,900 crore.
Vodafone counsel Harish Salve told the bench that, without prejudice to his client, the deposit, if any, should be Rs1,889 crore, including interest for three years, according to their assessment.
The bench, headed by Chief Justice S.H. Kapadia, arrived at the figure mentioned above and asked Vodafone for a bank guarantee on the remainder of the tax demand.
Salve said that while his client had no problem furnishing the bank guarantee, it would need eight weeks to do so as its finances were stretched after paying around Rs12,000 crore to the Indian government for third-generation (3G) mobile spectrum earlier this year.
The tax department contends that the transaction, while it might have been technically sound in international taxation law, was essentially an acquisition of an Indian asset for which the seller, Hutch, ought to have been made liable at the time it was executed. But since Hutch, a Hong Kong-based company, sold out and ceased business operations in India, the tax department is holding Vodafone liable to clear the dues on the deal.
“Are we not entitled to see the substance of this transaction and its legal effect? Were they (Vodafone) paying $11 billion to acquire a single share of a Cayman Islands company?” asked attorney general Vahanvati on behalf of the department.
The attorney general said during the hearing that although Hutchison Telecom International Ltd (HTIL) was the liable party, the government was unable to recover the dues from it.
“Today HTIL is not coming before us. HTIL is hiding behind Vodafone, who says that there is no tax liability,” Vahanvati said.
“It is unfortunate that the government of India runs such arguments. There is no link between Vodafone and Hutchison. How can I say that Hutch will pay a tax return?” Salve responded in the heated hearing that lasted an hour.
Kapadia repeatedly asked both Vodafone and the tax department, “We want to know, according to the principle of apportionment, what is the amount to be payable?” to which both sides consistently failed to provide an accurate figure.
Vodafone also challenged the fairness of the assessing officer in its petition, saying that the proceedings held by the department between 28 September and 20 October were “an empty formality”. It contended this on the basis of the chairman of the Central Board of Direct Taxes (CBDT), within hours of the Supreme Court’s hearing on 27 September, calling a press conference where he announced that Vodafone would be given a tax bill of around Rs12,000 crore, thereby prejudicing the company’s position.
The petition also contends that the I-T department ignored the directions to apportion the rights in the Bombay high court judgement in its 22 October order to Vodafone, although this issue was not orally raised before the apex court.
On 5 February, the apex court will start hearing the main issue in the matter—whether the Indian tax authorities have jurisdiction over the transaction through which Hutch transferred its rights to Vodafone. The acquisition enabled Vodafone Plc to partner with Essar in 2007 and replace Hutch in India.