I-T questions Vodafone’s asset transfer move

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SummaryThe income-tax department and British telecom major Vodafone are set for another legal fight over transfer of the company's passive infrastructure assets worth Rs.,000 crore to its group company.

The income-tax department and British telecom major Vodafone are set for another legal fight over transfer of the company's passive infrastructure assets worth R20,000 crore to its group company.

The department has challenged a Gujarat High Court order, which approved the company's plan to transfer passive infrastructure assets (PIA) — that include mobile communication towers and other related physical equipment worth R20,000 crore — from Vodafone Essar Gujarat and six other associate companies to group firm Vodafone Essar Infrastructure.

It has claimed that the scheme was intended to avoid capital gains tax worth R3,500 crore and stamp duty worth R600 crore and the transfer of these assets would have attracted the central sales tax or states VAT and other provisions of the Income Tax Act, 1961.

A bench headed by Chief Justice Altamas Kabir has sought reply from the company as to why it should be allowed to transfer its assets without paying capital gains tax.

The revenue authorities have said that the demerger scheme was against public interest and contrary to the company’s memorandum. It had further alleged the scheme was nothing but conduit to evade taxes such as I-T, stamp duty, registration charges and value-added tax.

“Despite recognising that the scheme may result in tax avoidance, the HC had proceeded to accord sanction... It is one thing for an assessee to engage in tax planning and quite another for a court exercising its jurisdiction under the Companies Act to sanction a scheme which is acknowleged as having the effect of tax avoidance and, thereby assisting the assessee in achieving that effect, more so when it is done by using a colourable devise and dubious methods,” said the petition.

Besides, it said that such a transaction was in form of gift and, hence, was beyond the scope of the provision of Sections 391 and 394 of Companies Act, 1956.

“...the present scheme, in guise of demerger, proposed gifting of PIA without any consideration and without transfer of any corresponding liability or employees” of Vodafone Essar Gujarat into the JV, the petition stated.

According to the petition, Vodafone, Bharti and Idea formed a JV (Indus Towers) and decided to pool in their existing PIA. Instead of directly transferring these assets to Indus for consideration, a conduit in form of a colourable device was developed to evade taxes, whereby the assets were first transferred into transferee companies and, then, these companies

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