Vodafone Essar has filed a writ petition in the Bombay High Court challenging the right of the tax authorities to levy a capital gains tax on it.
The writ is aimed at preventing the income-tax department from taking further action. The I-T department had issued a showcause notice to Vodafone Essar as to why it (Vodafone Essar) should not be treated as an agent of Hutchison International. Hutchison International had sold a majority stake in Hutchison Essar to Vodafone for $11.2 billion. Hutchison Essar is now called Vodafone Essar.
This is first time the sale of assets of one foreign company located in India to another foreign company has been sought to be taxed.
The writ was filed by the company on September 7, the day it filed its reply to the tax department’s notice. The court is likely to hear the petition on September 27. If the court grants an injunction or stay to Vodafone Essar, tax authorities may not be able to proceed further.
After a showcause notice is issued to an assessee, the tax authorities examine the reply and, if they wish, can start the assessment process. The procedure takes 2-6 months before the I-T department can raise a demand for tax payment. However, the department will now have to wait for the outcome at the court.
The company is contesting the claim by the tax authorities that it is an agent of Hutchison and, as a consequence, liable to pay capital gains tax. With the transaction value being $11.2 billion, the tax liability could be $1.7 billion. Hutchison, the seller, would ordinarily have this liability. However, since the tax authorities do not have access to Hutchison in Hong Kong, they have issued a notice to Vodafone Essar. The showcause notice did not mention an amount.
The I-T department is treating the case as a test case and has armed itself with legal opinion and views from experts.
The department wants to treat Vodafone Essar as an ‘agent’ of the non-resident (Hutchison International) under Section 163 of the Income-Tax Act, 1961, which is being contested by the company. The company, in its reply, has pointed out that since the transaction between Hutchison International and Vodafone was structured through Mauritius, it could not attract tax in India.
Tax authorities opine that the company may be chargeable to capital gains tax since the transaction involved transfer of an Indian asset for which approval of the Foreign Investment Promotion Board was sought. It is raising the claim under Section 9(1)(i) of the Income-Tax Act.