Vodafone has lost a significant tax bill in India after the Bombay High Court upheld a claim by the government for around US$2 billion following its purchase of a majority stake in Hutchison Essar.

In a press statement, Vodafone said: “The written order of the court is awaited. However, the court has extended the stay order for eight weeks, preventing the tax authority from proceeding in the case. This will also allow time for Vodafone to review the grounds of the court’s decision, once the written order is received, and file an appeal in the Supreme Court of India.”

“Vodafone, based on advice received, continues to believe that the transaction is not subject to tax in India and is confident of a positive outcome ultimately,” it added.

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. The Income Tax department had argued that Vodafone should have withheld the tax payable from the sum paid to Hutchison Telecom, while Vodafone was of the opinion that any tax liability should be paid by the beneficiary - namely Hutchison.

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.

Source:cellular-news