Vodafone must pay tax on Hutchison deal: HC

Giving a major setback to Vodafone, the Bombay High Court on September 8th ruled out Vodafone International's plea challenging the Income Tax order, demanding Rs 12,000 crore in tax liability case of Hutchison Essar.

The court ruled that Vodafone must pay capital gains tax on its $11-billion acquisition of a controlling stake in Hutchison Essar that was completed in 2007.

Vodafone, through its group firm Vodafone International Holdings, had bought Hutchison Telecommunications India Ltd's (HTIL) stake in Hutchison Essar in 2007 for over $ 11 billion.

HC rejected Vodafone's appeal against a ruling by the tax department that it had a right to tax the UK firm's acquisition of a majority stake in Hutchison Essar, giving a green signal to the tax firm of having the jurisdiction to proceed against the telecom major.

The Income tax department had issued a show-cause notice to Vodafone in the same year saying that the company should have withheld tax when it cleared payments to Hutchison. The UK-based global telecom giant subsequently filed a petition against this in Mumbai.

Vodafone in an all confident mood is ready to move to the Supreme Court as it says that there is no tax to pay on the transaction. The company says that Indian law did not require it to deduct tax because it bought the stake from CPG Ltd. in a deal that took place in the Cayman Islands. CPG is owned by Hutchison Telecommunications International Ltd.

Based on the Section 9 of the I-T Act, India's taxman however see the deal liable for capital gains tax and argue that Vodafone should have paid to the Indian government for its deal with Hutchison .

Section 9 of the I-T Act, says '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.

Though the British telecom is all geared up to move to the Supreme Court, but the high court's verdict has already started showing negative impact as the shares of shares Vodafone plunged over 1 per cent on the London Stock Exchange soon after the judgment.

However, this saga of Vodafone and Hutchison that is being closely monitored at the global platform as well is surely going to affect similar cross border deals like the General Electric (GE) selling majority stake in Genpact, Mitsui Co selling interest in mining company Sesa Goa to UK-based Vedanta group and Idea Cellular stake sale by US telecom operator AT&T to the Tata group. The Tata Group, which later exited Idea Cellular, had bought a Mauritian subsidiary of AT&T that held 16.5% in Idea, for $150 million. The case is pending before the Bombay High Court.