Vodafone deal under taxman’s lens again

Vodafone deal under taxman’s lens again

New Delhi: The income-tax department on Friday issued a notice to global telecom company Vodafone International Holdings BV, which marked the first step in its second attempt to levy a tax on the company’s $11.2 billion (Rs52,640 crore) purchase of a majority stake in Indian telecom company Hutch Essar Ltd.

A tax department media statement said Vodafone had been issued a show-cause notice asking why Indian authorities did not have the jurisdictional right to tax the company. Vodafone has been asked to comply with the notice on 16 November, the statement said.

The sequence of the second attempt to tax Vodafone mirrored the first attempt in 2007, which started when the tax department issued a show-cause notice. However, the developments of the first-round litigation between the tax department and Vodafone gave the department access to key features of the Vodafone’s transaction to buy Hutch Essar. Consequently, Friday’s show-cause notice assumed a different dimension.

“This is a far different level of proceedings," Mukesh Butani, partner, BMR Advisors, said.

A Vodafone media release said: “Vodafone confirms it has received a show-cause notice from the tax department today. This development does not affect the strength of Vodafone’s position. Vodafone will be reviewing the document in detail and intends to respond to the tax department in due course. Vodafone is confident that no tax is payable on this transaction; and all of the taxation and legal advice received remains consistent with this view. Vodafone has cooperated fully with the tax department throughout the process, and will continue to do so."

Tax department officials had earlier identified the Vodafone case as a litmus test of the Indian government’s right to tax transactions which involve a transfer of substantial control in Indian assets.

Vodafone paid $11.2 billion for a 67% stake of Hutchison Essar (since renamed Vodafone Essar) in 2007. The government approved the deal in May the same year. Hutchison, the seller, controlled its Indian subsidiary through a web of companies that finally led to a Cayman Islands-registered firm to receive the payment from Vodafone.

The tax 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, former chairman of the Central Board of Direct Taxes, had said in December.

Vodafone did not indicate if it would wait for a tax demand to be raised by a tax assessing officer before it took the next step. According to Butani, the company does not have to wait for a demand to be raised before it approaches the judiciary.

“They can challenge even before the demand is raised," Butani said.

Shauvik Ghosh contributed to this story.