Vodafone to challenge amendment to I-T law

MUMBAI: Vodafone, which is facing a $2-billion tax demand on account of its $11-billion acquisition of Hutch-Essar, is planning to move court in the first week of June against a recent amendment to the Income-Tax Act. Vodafone was asked to pay taxes by the Indian income-tax authorities on the capital gains arising from the sale of Hutchison’s stake in Hutch-Essar. Hutchison sold its 66% in Hutch-Essar to Vodafone for $11 billion in 2006. However, Vodafone dragged the income-tax department to the Bombay High court, saying being the buyer of the shares, it was not liable to pay taxes in India. It is in this context that the amendment to Section 201 of the Income-Tax Act, made with retrospective effect from 2002, becomes critical. The amended law stipulates that the buyer of the shares is also liable to pay taxes in India. The amendment will go against Vodafone, as it would effectively blunt the telecom major’s stand that even if the Hutch-Essar deal is taxable, Vodafone, the buyer, is not obliged to pay tax here. It is learnt that Vodafone would challenge the retrospective aspect of the amendment rather than the amendment itself. The amendment to the Income-Tax Act was incorporated in the budget proposal after a writ petition against the notices issued by the Income-tax Department was filed by Vodafone before the high court. Dinesh Kanabar, executive director and leader of tax practice, PricewaterhouseCoopers, which is handling Vodafone’s tax issue, told ET: “We would amend our writ petition already filed before the Bombay High Court, to challenge the amendment in section 201 of the Income-Tax Act.” Vodafone’s plan to challenge the amendment was mentioned before the Bombay High Court during the hearing of the Vodafone writ petition in March. Since Hutchison, a Hong-Kong based company, has not paid any tax on the deal, the amended law would bind Vodafone, who bought the shares from Hutch, to pay tax on the deal. Vodafone has chosen to wait until the Budget proposals get the President’s nod, before moving the court. The Income-tax department has cast its net wide recently, slapping notices on several cross-border mergers and acquisitions. Vodafone’s writ petition challenging the Income-tax notice was based on the following grounds. For one, the sale of Hutch-Essar shares by the Hong Kong-based Hutchison International to Vodafone was a transaction that took place outside India and, therefore, the Indian tax authorities have no locus standi on the deal. Two, Vodafone has no tax liability in India on account of the deal. The Indian tax authorities took a diametrically opposite stand. It said the profit made by Hutchison while it sold Hutch-Essar stake to Vodafone, was profit generated in India. Therefore, Vodafone, the buyer, has an obligation to pay the withholding tax in India, before making the payment to Hutchison.
30 May, 2008, 0000 hrs IST,M Padmakshan, TNN
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