Vodafone to take tax case to Supreme Court

December 5th, 2008 - 7:43 pm ICT by IANS  

New Delhi, Dec 5 (IANS) Telecom giant Vodafone Friday said it would challenge the government decision to impose capital gains tax on it following its acquisition of Hutchison Essar.The statement came after Bombay High Court Friday issued a written judgement upholding the Indian tax authorities’ decision to impose capital gains tax on the UK-headquartered telecom operator.

In a statement, Vodafone said it would appeal in the Supreme Court within the eight weeks granted to it by the Bombay High Court to respond.

“Based on advice received, we continue to believe that the transaction is not subject to tax in India and are confident of a positive outcome ultimately,” the statement added.

The Bombay High Court Wednesday had dismissed a petition by the UK-based global giant Vodafone, challenging a $1.7-billion tax notice served on it after it acquired a majority stake in the Indian company last year for $11.1 billion.

Vodafone had acquired the majority stake in what was then Hutch-Essar from the Hong Kong-based Hutchison Whampoa, following which it was served a notice to pay capital gains tax of around $1.7 billion.

The company now operates under the Vodafone brand.

The transaction was one of the largest mergers and acquisitions in India last year, and experts say the court’s directive could have a potential implication on several other such acquisitions, both executed and potential.

The Mumbai-based Ruias, who run the Essar group, have a minority stake in the venture.

The Income Tax Department has argued that the UK-based firm was not exempt from paying such a tax, despite the transaction being concluded overseas, since the assets of the acquired company were predominantly in India.

Vodafone’s lawyers have also argued that the transaction was executed through a subsidiary based in the Netherlands, and that since Hutchison was incorporated in Cayman Islands, India’s Income Tax Act did not apply.

According to them, the transfer of controlling interest is not a transfer of capital assets, and that the tax was payable by Hutchison, which was not based in India. They said the Income Tax Act cannot have “extra-territorial jurisdiction”.

But the tax administration said it expected Vodafone to deduct the tax at source before making the payment to Hutchison. It wanted to treat Vodafone as an agent of the non-resident company, Hutchison, under Section 163 of the Income Tax Act.

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