Vodafone insists no tax liability

Vodafone insists no tax liability

New Delhi:Vodafone International Holdings BV continued to contest the jurisdiction of Indian tax authorities on its $11.2 billion (Rs 49,728 crore today) acquisition of Hutchison Whampoa Ltd’s Indian operations in a much-awaited final hearing that began on Wednesday in the Supreme Court (SC).

Vodafone International Holdings, a Netherlands-based subsidiary of British telecom operator, Vodafone Plc, is appealing a September 2010 judgement of the Bombay high court, which ruled that the actual share transfer from Hutchison to Vodafone was not taxable, but tax authorities could apportion some of the underlying rights and levy a demand accordingly.

In May 2007, Vodafone International Holdings acquired a single share of Hutchison Telecommunications International Ltd (HTIL), a Cayman Islands company, by virtue of which Vodafone entered the Indian market. Last October, Vodafone was asked to pay 11,217.95 crore in taxes by income-tax (I-T) authorities, the single largest tax demand ever made. Vodafone has consistently opposed this, claiming the deal doesn’t come under Indian tax jurisdiction. Vodafone currently owns 67% of Vodafone Essar Ltd.

“The transfer of control over downstream companies is not a basis for exercising tax jurisdiction. This is the heart of the matter," submitted Vodafone’s counsel Harish Salve, as he explained to the court the complex web of holdings through which the transaction was effected.

This was in response to a question from Chief Justice S.H. Kapadia, who asked: “Suppose the sale of shares results in the transfer of control of business, then what happens?"

Vodafone’s legal strategy on the first day of the hearing was aimed at convincing the court that the holding structure of Hutchison before the deal was not created with the intent to evade tax. “Vodafone has nothing to do with this. This was the existing structure of HTIL. The reason why there is this criss-cross structure is because it grew into that. People came in, people went out. This is commercial reality. This is why you set up so many companies—to remain liquid, so that you can sell off 5%, 10%," said Salve.

Salve also argued on the difference between “tax evasion" and “tax avoidance" and submitted that Vodafone and Hutchison had only used the latter to complete the transaction as per the law which prevailed at the time.

“This is exactly the difference between permissible tax planning and using jurisdiction to camouflage a transaction."

The case is being closely watch globally as it could potentially affect several other transactions directly or indirectly involving Indian assets.

Under section 195 of the Income-tax (I-T) Act, 1961, the department is holding Vodafone liable for not withholding capital gains tax from the payment made to Hutchison. “Strictly speaking, we are being taxed under TDS (tax deducted at source) on the capital gains income which HTIL would have earned in India," Salve told the court. While Vodafone has maintained that the deal was not taxable, it has also said that if the tax authorities did somehow manage to find jurisdiction, then it should be Hutchison that’s liable to pay. The tax department asked Vodafone on 15 October 2010 why it should not be treated as Hutchison’s agent (under section 163 of the I-T Act) and, therefore, be held liable for not withholding tax. This case is pending before the Bombay high court.

Penalty proceedings by the tax department are also under way, which could amount to 100% of the tax demand, says Vodafone. But SC in April clarified that these proceedings will be subject to the outcome of the main case, hearings for which are likely to continue at least until next week.

Remya Nair contributed to this story.