Set-Back for Vodafone in Indian Tax Battle

Vodafone's tax battle with the Indian government has suffered a further set-back when the Supreme Court refused to hear an appeal by the telecoms giant - and ordered that the case be sent back to the tax department for its deliberation as to who should have legal jurisdiction over the case.

The court also ordered Vodafone to produce the original sale-agreement between itself and Hutchison Essar - which had not been delivered to the Bombay court as previously requested.

A statement from Vodafone 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 (and no other issues)."

Last December, the Bombay High Court ruled that Vodafone could be held liable for a US$2 billion tax demand following its purchase of a controlling 67 per cent stake in Vodafone Essar, formerly known as Hutchison Essar. The court ha however extended the stay order for eight weeks, preventing the tax authority from proceeding in the case - to give the firm time to mount its appeal.

Vodafone had paid US$11.2 billion for a 67 percent stake held by Hutch Telecommunications International in Indian GSM operator Hutchisson-Essar (now Vodafone Essar).

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.

Although Vodafone had argued that the transaction occurred overseas - the court decided that as the assets were largely based in India, therefore taxes should be paid in accordance with Indian laws.

Vodafone could however, face a potential US$4 billion penalty if the company loses the appeal - as the government is entitled to demand to levy a penalty which can result in a doubling of the outstanding tax demand.

Posted to the site on 24th January 2009