New Delhi: The Supreme Court’s (SC) refusal to intervene in the tax dispute between telecom firm Vodafone and the income-tax (I-T) department on Friday has partially addressed concerns raised by both sides, but has also effectively set the clock back on the issue.
The dispute concerns Vodafone Group Plc.’s acquisition of a 67% stake in Hutchison Essar from Hong Kong’s Hutchison Telecommunications International Ltd. The I-T department is of the opinion that the transaction is taxable in the country. Vodafone disputes this claim.
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Friday’s order, delivered by a bench headed by justice S.B. Sinha, said I-T authorities should deal with the fundamental question of whether the transaction falls within their tax jurisdiction. Simultaneously, the order has allowed Vodafone to bypass the department’s grievance redressal mechanism and approach the high court if it disagrees with the department’s tax assessment order.
This will allow Vodafone to reduce the time it takes to solve a dispute or have its money locked up through part-payment of a disputed tax demand. “That appears to be the logical interpretation of the Supreme Court order,” said Sudhir Kapadia, partner at audit and consulting firm Ernst and Young (E&Y).
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Vodafone paid $11.1 billion (Rs54,600 crore today) for a 67% stake of Hutchison Essar (since renamed Vodafone Essar) in 2007. The government approved the deal in May of the same year. Hutchison, the seller, controlled its Indian subsidiary through a cobweb of companies that finally led to a Cayman Islands-registered firm to receive the payment from Vodafone.
The I-T department felt the Cayman Islands transaction was essentially a transfer of an Indian asset and said that Vodafone should have deducted tax at source when it paid Hutchison. In 2007, Vodafone received a show-cause notice asking it why it had not done this. Following this, the company approached the Bombay high court.
The case was significant on account of the tax amount involved (around $2 billion) and the precedent it could set for taxation of transactions, which involve transfer of Indian assets, but are concluded overseas. The tax incidence makes this “perhaps the highest tax matter in the country”, N.B Singh, chairman of the Central Board of Direct Taxes, had said in December 2008.
After the Bombay high court in December dismissed Vodafone’s petition challenging the I-T department’s notice, the company appealed to the Supreme Court in January. The primary question that Vodafone requested the apex court to answer was whether Indian authorities have the jurisdiction to tax a transaction that occurred outside India between parties that do not have a presence in India.
The Supreme Court has not ruled on this or set a precedent, which could be used in getting a sense of tax liabilities in subsequent transactions, experts said.
Mukesh Bhutani, who heads the tax practice at BMR Advisors, said the Supreme Court order has the issue “back at square one”. “But now Vodafone also has the Supreme Court directive that says they can approach the Bombay high court. So, they will not have to go through the entire rigmarole and the high court will have to admit its challenge to the I-T authorities’ decision.”
Uncertainty continues to loom over transactions similar to the one between Vodafone and Hutch, Bhutani said. “Most people had expected that the Supreme Court would not just look into the Vodafone plea, but lay down principles in law relating to the taxability of such transactions,” he said.
The Supreme Court order, however, provided relief to Vodafone on two important counts. It allows the company to bypass the I-T department’s grievance redressal mechanism if it disputes the assessing officer’s tax demand.
“In my view, it would save at least two-three years,” said E&Y’s Kapadia.
Also, the I-T department’s grievance redressal mechanism could ask Vodafone to pay a part of the tax demand till the dispute is finally resolved. Generally, a company that disputes a tax demand never gets a “complete stay” on the entire demand, Kapadia said, referring to part-payments that might have to be made on disputed tax demands.
The bench, however, gave Vodafone an option to move the high court if it wishes to challenge the tax authorities’ decision.
The Bombay High Court, in its December order, drew an adverse inference from the fact that Vodafone had not disclosed its shareholder agreement.
On Friday, senior counsel for Vodafone, Fali Nariman, told the Supreme Court bench that the agreement had been given to the tax department and Additional Solicitor General Mohan Parasaran appearing for the Union government.
Vodafone’s refusal to disclose this to the Bombay high court was one of the factors that led to the court dismissing the company’s petition.
“It is a moral victory for the revenue department. The Supreme Court has not disturbed the high court’s observations that were against Vodafone. Vodafone could be apprehensive that the high court’s negative observations can be used against them by the income-tax authorities,” BMR Advisors’ Bhutani said.
According to a Vodafone media statement, “Given the fact that the petition filed by Vodafone involves important questions of jurisdiction, the Honourable Supreme Court of India has asked the Tax Authorities to decide, as a preliminary issue only, whether it has jurisdiction to proceed against Vodafone... Should Vodafone be aggrieved by the order of the Tax Authorities’ preliminary adjudication on jurisdiction, Vodafone has been permitted to again directly approach the High Court.”