Vodafone taxable under Indian tax laws: I-T dept

Written by Rachana Khanzode | Mumbai | Updated: Aug 19 2010, 04:46am hrs
Additional solicitor-general Mohan Parasaran, representing the I-T department in the ongoing Vodafone case in Bombay High Court on the second day of arguments presented by the income tax (I-T) department, said the provisions of Indian tax laws (Section 9) are enough to tax transfers by Hong-Kong based Hutchison Telecom International (HTIL) and, therefore, there was no need for any specific look-through provisions. However, in a move reflecting the complexity of the case, the division bench of the HC comprising justice DY Chandrachud and justice JP Deodhar posed an array of questions to Parasaran on various aspects of the argument.

According to Section 9 of the I-T Act, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India is taxable.

However, the division bench asked Parasaran to establish what the capital asset in this case was, the source or the head under which the I-T department proposes to tax the income and whether the source generates income in India. The larger question that the judges put forward was whether the transaction would have been effected by transfer of only one share of CGP Investments (Holdings), Cayman Island.

The I-T department also presented facts on how the transaction was structured in a complex way through various entities. Parasaran said that CGP held 37.25% stake in Telecom Investments India Private Limited (TII) and the rest 62.75% was indirectly held by Indian companies owned by Asim Gosh, former MD of Vodafone Essar and Analjit Singh, founder & chairman, Max India.

TII was indirectly holding 19.5% in Hutchison Essar Ltd (HEL). HTIL indirectly through some framework of agreements had the call options to buy the remaining stake in TII. In effect, being a minority holder, CGP could not transfer shares to Vodafone and would have required HTILs approval. In a nut shell the I-T department said that if one share of CGP was acquired Vodafone, it would have been able to transfer only 42.34% in HEL to Vodafone, which was held by it through various subsidiaries. Therefore, for the transfer of remaining shares it required approval from HTIL.

CGP now has 52% stake in Vodafone Essar, 33% is held by Essar and the remaining 15% is held by others including Asim Ghosh, Analjit Singh and private equity firm IDFC .

This is the second round of litigation in the dispute around Vodafones tax liability in the $11.2-billion deal whereby it acquired HTILs 67% stake in Hutch-Essar (now Vodafone Essar), in 2007. The case, which has its origins in 2007, had reached up to the Supreme Court, which, in January 2009, referred it back to the I-T department. On May 31 2010, the I-T department held in a ruling that it had the jurisdiction to tax the transaction. The tax liability of Vodafone is estimated to be around $2 billion. Consequently, VIHBV again filed an appeal on 07 Jun 2010 with the Bombay High Court against the order on jurisdiction issued by the Tax Authority on 31 May 2010.