Vodafone plea against $1.7-bn tax dismissed

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: In a judicial interpretation that could make foreign acquisitions costlier in India, the Bombay High Court on Wednesday dismissed a Vodafone petition against the revenue department’s claim of $1.7-billion capital gains tax on the Hutchison Essar acquisition. Vodafone had bought 52% stake in Hutchison Essar for $11 billion in 2007.

A division bench of the court headed by Justices S Radhakrishnan and Anand Nirgude held that Vodafone is liable to pay tax despite both parties to the buyout being offshore entities. The court held that the transfer of shares between the two offshore companies impacted the beneficial ownership of Hutchison Essar in India.

“This interpretation will affect a significant number of cases,” said TP Oswal of accounting firm Chaturvedi & Shah. For starters, an immediate impact could be on the ongoing Supreme Court case between General Electric and the income tax department on capital gains tax on the sale of GE’s 60% stake in Genpact.

There are about 100 cases pending in different courts where revenue authorities have sought payment of capital gains tax on buyouts and partial acquisitions. “The judgement raises the level of uncertainty on offshore transactions and companies will have to factor in taxes,” said Mukesh Butani, tax partner, BMR Advisors.

Vodafone International Holdings BV had challenged a tax notice slapped by the income tax department to pay the $1.7-billion tax. The court upheld the tax department’s plea that there could be no waiver of the tax that India usually allows in the case of countries with which there is a double tax avoidance pact.

Vodafone now has the option to file an appeal in the Supreme Court and thereby extend the stay on the I-T department’s show-cause notice, for another eight weeks. A tax official said the exact tax implication on Vodafone will be ascertained only when the assessment is finalised.

Commenting on the high court’s verdict, a Vodafone statement said that “based on its advice, it continues to believe that the transaction is not subject to tax in India and is confident of a positive outcome ultimately.” The company will file an appeal after it gets the written order from the court.

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