Agreement seen vital in Vodafone’s $2 bn tax case

Agreement seen vital in Vodafone’s $2 bn tax case

New Delhi: The contents of Vodafone International’s undisclosed February 2007 agreement with Hutchison International to enter the Indian telecom market may be critical to its tax case if it approaches the Supreme Court.

Vodafone’s refusal to disclose this to the Bombay high court was one of the factors that led to the court dismissing its writ petition challenging the income-tax (I-T) department’s notice asking for information to find out if the deal was subject to domestic tax.

“The high court asked for the agreement to determine the nature of transaction. That’s an important part. It will certainly come up before the Supreme Court, but whether the Supreme Court will consider it necessary is not known," said Uday Ved, head of tax practice at audit and consulting firm KPMG.

In its judgement, the Bombay high court said: “We are also clearly of the view that the petitioner (Vodafone) has wilfully failed to produce the primary/original agreement dated 11 February 2007."

Vodafone’s counsel and partner of ALMT Legal, Hitesh Jain, said that Vodafone would appeal the high court’s judgement in the Supreme court. “Now that interim relief has been granted by the high court for a future period of eight weeks, the matter will be decided by the Supreme court."

He said that the “judgment is at best confined to facts" and could have been of a “precedent setting" nature if the court had looked at whether a transfer of shares between two foreign entities could be brought under the ambit of Indian tax laws.

Also Read Bombay High Court’s Judgement (PDF)

Instead, the court’s ruling was procedural—on the right of the I-T department to ask for information. “In view of the high court judgement, the I-T department can issue a show cause notice or make an enquiry in transactions of similar nature," Jain added.

Anticipating a move by Vodafone International to approach the Supreme Court, the I-T department plans to shortly request the apex court to keep it informed in the event Vodafone approaches it.

“We will file a caveat before the Supreme Court so that there is no ex parte stay. We will do it very soon," Prakash Chandra, director general of international taxation, said on Thursday.

The tax incidence in the case is around $2 billion (nearly Rs10,000 crore), making it “perhaps the highest tax matter in the country," N.B Singh, chairman of the Central Board of Direct Taxes, said.

Vodafone bought 67% of Hutchison Essar for $11.1 billion in 2007 and got the government’s approval for the deal in May 2007. Hutchison controlled its Indian subsidiary through a cobweb of companies that finally led to a Cayman Islands-registered firm receiving the payment from Vodafone.

Though I-T department officials said they would await the written judgment before extensive comment, Chandra interpreted the verdict, dismissing Vodafone’s writ petition, as saying that the tax department had the “jurisdiction" to raise a tax demand.