I-T dept slaps Rs7,900 crore penalty on Vodafone

Vodafone’s tax imbroglio just won’t end, it appears. In a widely expected move, the tax department is learnt to have passed an order on Vodafone International Holdings BV for tax penalty of Rs7900 crore.

The penalty has been levied under the provisions of section 271C of the Income Tax Act.

Vodafone had in February 2007 purchased 66.98% equity and other interests in Hutchison Essar Ltd (HEL) from Hutchison, which has been held as taxable in India.

The I-T department has concluded that Vodafone has failed to deduct tax under section 195 “without reasonable cause” in respect of payment of sale consideration to Hutchison. The penalty is equivalent to 100% of the tax demand (excluding interest) order. However the same cannot be enforced since the Supreme Court vide order dated April 15, 2011, has granted a stay on the recovery of penalty.

“The tax authority has called this a “test case”. As this is an appropriate characterisation due to the attempt to interpret long established law in a completely new way, Vodafone continues to be surprised by the tax office’s actions in respect of the question of penalties,” Ben Padovan, a Vodafone spokesperson said on the tax department’s move.

The provisions of section 271C of the Act provide that if a person fails to deduct tax as required under the provisions of chapter XVII-B, then such person shall be liable to pay by way of penalty, a sum equal to the amount of tax which such person had failed to deduct.

I-T department has concluded in its penalty order that “violation of section 271C involving the breach of a civil obligation, as in the present case attracts the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention.”

“Furthermore it is clear that since the language of section 271C does not intend the need to establish mens rea —- intention or knowledge that an act is wrong —- it is generally sufficient to prove the default/contravention in complying with the provisions of section 195 of the Act,” it said.

The department has also held that there was no “reasonable cause” involved in Vodafone’s default. As per section 273B, penalty would not be levied if the assesses proves that there was reasonable cause for failure to deduct tax under section 195.

Bombay High Court earlier has held that the transaction was not confined to the transfer of share of the Cayman Island company but was related to the transfer of HTIL’s interest in the telecommunications business in India and that the income accrued and arose and was derived as a consequence of the divestment of HTIL’s interest in India.

Vodafone has filed an appeal before Supreme Court against the Bombay High Court decision. On 15 April, in response to Vodafone’s request for protection against such action from the tax authority, the Supreme Court prevented the authority from taking any step to enforce penalties on Vodafone until further orders from the court following the upcoming hearing on jurisdiction on 19 July.

Therefore, the tax authority is precluded from taking any steps to enforce this order against Vodafone, the official said in the same email.

— The writers are with taxsutra.com