In a major setback for telecom major Vodafone, the Supreme Court on Friday dismissed its special leave petition challenging a show-cause notice issued by the income-tax department. The department demands $1.7 billion in capital gains tax for Vodafone?s February 2007acquisition of Hutchison?s 52% stake in Hutch-Essar for $11.2 billion. Vodafone says the income-tax department has no jurisdiction over a deal between two overseas companies.
A bench headed by Justice SB Sinha refused to hear the Vodafone plea, saying there was no need for judicial intervention at this stage. It directed the company to first respond to the show-cause notice, obtain a view on jurisdiction by the tax department and then, if it felt aggrieved, move the High Court. ?We will consider (the) jurisdiction issue at a later stage,? the bench said.
However, responding to the show-cause notice means Vodafone would have to divulge details of its acquisition, something it has steadfastly refused to do so far. Moreover, if the tax department finds Vodafone in default of tax payments, it would also be liable to pay a penalty and 18% annual interest. Back-of-the-envelope calculations tot up the outgo at nearly $4 billion.
Tax experts, though, say it could take up to four years before Vodafone actually has to fork out the money. ?The company would now have to prepare for a long haul through the entire judicial process,? said Amitabh Singh, partner at Ernst & Young.
In response to the court order, a Vodafone spokesperson said, ?Given the fact that the petition filed by Vodafone involves important questions of jurisdiction, the Honourable Supreme Court of India has asked the tax authorities to decide, as a preliminary issue only, whether it has jurisdiction to proceed against Vodafone. Should Vodafone be aggrieved by the order of the tax authorities? preliminary adjudication on jurisdiction, Vodafone has been permitted to again directly approach the High Court.?
Vodafone had earlier filed a writ petition with the Bombay High Court challenging the tax department?s show-cause notice. It had argued that that the tax department had no jurisdiction over a deal between two parties incorporated overseas. The High Court on December 3 dismissed the petition and held Vodafone liable to pay tax in India.
It ruled that even though shares were transferred between two offshore entities, there was change in beneficial ownership of the company in India. The tax department in its show-cause notices sent under Sections 163 and 201 (1) of the Income-Tax Act had contended that as the former Hutchison-Essar was as an ?agent? of non-resident Hutchison Inter- national, the transaction involved Indian operations and therefore was liable to be taxed.
Tax experts point out that the Supreme Court ruling reaffirmed jurisdiction of the Indian tax authorities over such transactions. ?This is evident from the fact that the Supreme Court refused to intervene in the case and asked Vodafone to present its version before the revenue authorities and respond to the show-cause notice,? said Mukesh Bhutani, a tax partner with BMR Advisors.
The dismissal of Vodafone?s petition is expected to have far-reaching consequences. The tax department has already begun investigating over 100 cross-border M&As for payment of capital gains tax. Friday?s development is also expected to have an immediate impact on the ongoing case in the Supreme Court between General Electric of the US and the income-tax department over capital gains tax for its 60% stake sale in Genpact.