Indian Court Delays Vodafone-Essar Tax Liability Legal Claims

The High Court in Bombay, India has adjourned the legal case filed by Vodafone-Essar against the capital gains tax claim from India's Income-Tax Department. The tax office has sought to delay the legal proceedings as it says it was not ready to deal with the petition from Vodafone as the capital gains tax had not been formally levied on Vodafone's purchase of Hutchison International stake in the former Hutchison Essar.

The issue is understood to be based on the interpretation of Section 9(1)(i) of the I-T Act, which states that if any property located in the country is transferred to a new owner, then it attracts capital gains tax at a rate of 22%. The matter is complicated by the legal definition of which subsidiaries carried out the transaction. If the tax department can show that the India based Vodafone-Essar acted as an "agent" of Vodafone in its overseas purchase (arranged via Mauritius) of Hutchison Telecom's shares in Hutchison-Essar, then it may be possible that Vodafone-Essar could be held liable for the tax demand.

Vodafone International Holdings BV, a company registered in the Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd, a Cayman Islands based company from Hutchison International (HTIL). CGP, itself, owns 52 per cent stakes in Hutchison India.

Vodafone Essar has argued that Vodafone Holdings , CGP Investments as well as HTIL are foreign companies and as the transaction was structured through Mauritius, capital gains cannot have been accumulated within India. Also India and Mauritius have a double taxation avoidance treaty, so it would not be possible for India to apply capital gains tax on transactions that are already taxed within Mauritius.

Posted to the site on 16th October 2007