HC says Vodafone has to pay taxes in India

The Bombay High Court on Wednesday dismissed Vodafone International's petition against the Income Tax ( I-T) department's demand for coughing up Rs 12,000 crore as tax and penalty on the $ 11 billion ( about Rs 50,000 crore) paid by the UK company for acquiring Hutchison Telecom's stake in mobile telecom company Hutchison Essar in 2007.

A division Bench comprising Justice Dhananjay Chandrachud and Justice J. P. Deodhar held that the I-T department had the jurisdiction to tax the transaction.

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The transaction has sufficient nexus with India and the I-T department has the jurisdiction to levy tax on the transaction, the bench noted while delivering the verdict. The decision comes as a major setback to Vodafone as the company had not factored in the tax liability at the time it bid for the Indian operations of Hutchinson Telecom.

According to sources, the I-T department has raised the demand for about Rs 8,000 crore as tax and another Rs 3,500 crore as penalty.

The High Court, however, allowed Vodafone to argue its case before the tax department over the imposition of the penalty as the company genuinely believed that it had no liability to deduct tax at source at the time of the deal.

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 to take over the company. Indian conglomerate Essar holds about 33 per cent stake in Vodafone India.

The I-T department had served a notice to Vodafone for not deducting tax at source from the payment made to Hutchison and claimed around Rs 12,000 crore in tax and penalty on the deal.

The court had to decide whether the I-T department can ask a foreign company to pay tax in India if it takes over another foreign entity that owns an Indian subsidiary, and particularly so, if the deal is struck outside India.

While the I- T department contended that the transaction was liable for tax payment in India, Vodafone International Holdings argued that both the seller and the buyer were foreign companies and that the deal was struck outside India.

The judgment will have a bearing on acquisitions of Indian firms by foreign firms in the future. Analysts said it will make foreign players more cautious while making investments in India. However, a senior income tax official said the judgment had made matters clear and any future deals would factor in the tax aspect in the due diligence exercise and no one would be caught unawares.

" I don't think the verdict would discourage future acquisitions as companies eye the market opportunities and the profit potential of a fast growing economy like India," he added.

"Private equity inflow will definitely come under pressure as the investor will have to be extra cautious before entering India. However, looking at the potential foreign firms see in India, the companies will just be cautious and would not shy away," SMC Capitals' Jagannathan Thunuguntla said.