I-T dept slaps 11,218 crore tax demand on Vodafone

I-T dept slaps 11,218 crore tax demand on Vodafone

New Delhi: The income-tax (I-T) authorities on Friday for the first time raised a tax demand of 11,217.95 crore on Vodafone International Holdings BV for not having deducted tax at source when it paid Hutchison Telecommunications International Ltd $11.2 billion ( 49,840 crore today) in 2007 to buy the latter’s majority stake in Indian telecom firm Hutchison Essar Ltd.

The company has been asked to pay the tax within 30 days, a tax department statement said.

“Vodafone strongly disagrees with the tax calculation released by the Indian tax office to the media today," a company statement said. “In any event, Vodafone also believes the tax calculation released by the Indian tax office today is unfounded as it has failed to follow the conclusions of the recent Bombay high court judgement."

“This calculation, as well as any appropriate stay of payment, will be reviewed when the matter comes before the Supreme Court on 25 October 2010," Vodafone said in its statement.

Vodafone has challenged the I-T department’s right to tax its 2007 deal with Hutchison in the Supreme Court.

In the last hearing in the apex court in September, the tax department had been asked by the court to raise a demand within four weeks. Vodafone can ask the court for relief from payment till the case is finally settled, a person associated with the company’s legal team said on condition of anonymity.

In May 2007, Vodafone bought Hutchison Telecommunications International’s 66.98% stake in Hutchison Essar for $11.2 billion.

Hutchison controlled its Indian telecom subsidiary through a Cayman Islands firm called CGP. CGP’s shares were sold to Vodafone. Vodafone’s contention has been that the existing Indian law does not give Indian tax authorities jurisdiction over an overseas transfer of the kind it was involved in.

The tax authorities dispute this and say Vodafone should have deducted tax at source before paying Hutchison.

In September 2007, the tax department for the first time communicated with Vodafone on the issue.

After three years of twists and turns in the case, last month the Bombay high court handed out a verdict in the case, which the company challenged in the Supreme Court a few days later.

The key findings of the high court, some of which Vodafone claimed were not followed by the tax department in Friday’s demand, are that the deal fell within the jurisdiction of Indian authorities and the company had not engaged in a sham transaction to avoid tax.

The court said the tax department would have to apportion that part of payment made by Vodafone which was related to Indian assets in order to tax the transaction.

The person associated with Vodafone’s legal team said Friday’s demand seemed to make a “random" apportionment. It did not detail the logic supporting the 11,217.95 crore demand, the person added.

The tax department had also on 15 October asked Vodafone to?show-cause?on why it should not be treated as Hutchison’s agent (under section 163 of the Income-Tax Act). The Bombay high court on 27 October is scheduled to hear Vodafone’s writ petition asking for relief from the new proceeding.

According to a senior tax official associated with the case, who did not want to be named, the case in the Supreme Court was about Vodafone’s failure to withhold tax. Typically, the withholding tax gets adjusted once the tax department finishes its assessment of the principal (Hutchison, in this case).

As Hutchison does not have an address in India, the tax department has invoked section 163 to ask Vodafone to show-cause on why it should not be treated as Hutchison’s agent.