Vodafone plea quashed on technicality

HC says appellate tax authority is the place to seek redressal first

MUMBAI: The Bombay High Court on Wednesday dismissed a petition filed by Vodafone Plc challenging a show-cause notice issued by the Income Tax Department for payment of capital gains tax amounting to $2.1 billion.

The petition has been dismissed on technical grounds that the tax department’s notice is not patently illegal or without jurisdiction.

Justices S Radhakrishnan and A V Nirgude held that Vodafone’s petition was premature as it had not exhausted the alternate remedy of approaching the appellate income tax authority.

The court held that the issue whether Vodafone is liable to pay capital gains tax for acquiring Hutchison Essar will be decided by the adjudicating authority and not by it.
Vodafone International Holdings has been granted a stay on the decision for eight weeks by the high court, following a plea by its counsel Iqbal Chagla, said Dinesh Kanabar, executive director, tax and regulatory services at PricewaterhouseCoopers, the tax consultant for Vodafone.

The 160-page judgment was not made available to the parties on Wednesday as it is yet to be signed by Nirgude, who is currently assigned to the court’s Aurangabad bench.

Vodafone is likely to file an appeal in the Supreme Court as soon as it gets a copy of the judgment.

In September 2007, Vodafone Group Plc paid $11.2 billion to a Cayman Islands-based unit of Hong Kong’s Hutchison Whampoa for a controlling stake in Hutchison Essar.

It received a tax bill from the Income Tax Department, which said Vodafone was liable to pay capital gains tax as most of the assets it bought were based in India.

Vodafone challenged the charge, arguing the Indian law at the time did not require it to withhold tax on the acquisition, and that capital gains tax was usually paid by the seller, not the buyer.

It also questioned the constitutionality of a retrospective change to the Indian tax law in May this year that would allow the government to take action against companies that do not withhold taxes when making a transaction.

Chagla also said the transaction is not taxable in India because it was for an overseas sale of shares in a foreign company.

“There is no business connection that would give rise to taxable income in India nor is there transfer of any capital asset in India,” Chagla said.

The court upheld the Income Tax Department’s arguments made by additional solicitor-general Mohan Parasaran and advocate Beni Chaterjee stating that the telecom giant’s petition was “premature”.

Parasaran said Vodafone was carrying out a joint venture in the Indian operating company.

“India-operating companies working under the Hutchison umbrella since 1994 were
nothing but joint ventures with the Essar group and now continue to be same with the Vodafone group and hence are liable to pay taxes in India,” the Income Tax authorities claimed.

Vodafone Essar had 56.7 million subscribers at the end of October, making it the third-biggest operator behind leaders Bharti Airtel Ltd and Reliance Communications Ltd.

With Reuters