Vodafone International Holdings BV filed a writ petition in the Bombay high court on Friday seeking to insulate itself from the income-tax department’s attempt to explore a second route to tax the company’s 2007 deal with Hutchison Telecommunications International Ltd to buy the latter’s majority stake in Indian telecom company Hutchison Essar Ltd.
At present, Vodafone and the tax department are already engaged in a legal battle in the Supreme Court (SC), where the former has challenged Indian authorities’ jurisdiction over the deal.
Friday’s development was the outcome of a “tactical move” by the tax authorities in its battle against Vodafone, a person associated with the company’s legal defence said on condition of anonymity.
The tax authorities believe Vodafone is liable to pay withholding tax estimated at Rs12,000 crore on the deal.
“The tax office has now initiated a different process—treating Vodafone as an ‘agent’ of the seller,” an e-mailed statement of the company said. “To protect its position, Vodafone has today filed a writ with the Bombay high court defending itself against these new steps being taken by the tax office,” the statement added.
The origin of Friday’s development goes back to May when the tax department sent a report to Vodafone explaining why the deal fell within their jurisdiction. Along with a report, the tax department also sent the company a “show-cause” notice on why it should not be taxed as Hutchison’s agent (Section 163).
“This is a parallel issue,” said a senior tax official involved in the case, who did not want to be quoted. “There are two cases here.”
Friday’s writ was related to the case in which the tax department had asked Vodafone why it should not be treated as a representative assessee of Hutchison, the official said.
The case in SC was about Vodafone not having deducted withholding tax when it paid Hutchison in 2007, the official added.
The roots of the case go back to May 2007, when Vodafone bought Hutchison’s 66.98% stake in Hutchison Essar for $11.2 billion.
Hutchison controlled its Indian telecom subsidiary through a Cayman Islands firm called CGP. CGP’s shares were sold to Vodafone, which consequently became a majority owner of the Indian telecom firm. Vodafone’s contention all along has been that the existing Indian law does not give Indian tax authorities jurisdiction over an overseas transfer of the kind it did.
The tax authorities have so far disputed the contention and say Vodafone should have deducted tax at source before paying Hutchison. With Friday’s development they have introduced another reason on why Vodafone is liable to be taxed.
“While the core question of jurisdiction is now being considered by SC, the department has resorted to this different approach in order to recover the tax from Vodafone in relation to the same demand,” Nishith Desai, Vodafone’s special counsel, said in an e-mailed statement. “Therefore, a writ petition has been filed before the Bombay high court, which would hear the matter on 27 October 2010.”
Before that, SC will hear the next round of arguments between the lawyers of Vodafone and the tax department on 25 October.
According to two people associated with Vodafone, the immediate cause for Friday’s writ was a recent communication from the tax officer assessing Vodafone’s tax liability. In the communication, the officer asked the company’s representatives to present themselves for a hearing on the show-cause notice under Section 163.
Vodafone then chose to approach the Bombay high court with a writ as it expects SC may decide on whether the Indian income tax authorities have jurisdiction over the deal with Hutchison to begin with.
“I think that the (tax) department has chosen to proceed since SC refused to grant a stay (on) the Bombay HC (high court) order,” said Mukesh Butani, partner at BMR Advisors.
“One view is that SC rejected Vodafone’s plea for stay of Mumbai HC order. The other view is that SC will continue Vodafone’s plea in the next hearing,” Butani said, explaining the possible reason for the tax department’s attempt to move forward with the Section 163 notice.
Bombay high court’s verdict in September partially upheld positions of both sides and said tax authorities could unbundle different rights conferred through shareholding to tax aspects relevant to India.