SC rejects government’s review petition in Vodafone tax case

The Supreme Court today dismissed the government's petition seeking a review of the SC's earlier ruling that the income tax department does not have the jurisdiction to levy any tax on the overseas deal between Vodafone International Holdings and Hutchison Group.

A bench comprising Chief Justice S H Kapadia and Justice K S Radhakrishnan dismissed the government's review petition in the Vodafone tax case in an in-chamber proceeding,

Responding to verdict, Vodafone said it emphasised the legality and bona fides of the transaction.

"The Supreme Court's clear and unambiguous ruling today, based on the existing laws of India, re-iterates that the Indian tax authority  does not have the jurisdiction to tax the transaction. We look forward to the return of our deposit immediately.''

The Supreme Court had, in its judgment on 20 January 2012, set aside a 2008 Bombay High Court order that upheld a Rs11,000 crore ($2.2 billion) tax demand by income tax authorities on Vodafone's acquisition of Hutchison's telecom assets in India through an overseas transaction, saying it did not involve a transaction in India. (See: Vodafone wins tax case in Supreme Court). 

The SC held that it was entirely an overseas deal between offshore units of UK-based Vodafone Plc and Hong Kong-based Hutchison Whampoa.

The government, in its petition, had sought reconsideration of the 20 January SC ruling on the ground that the verdict had failed to correctly interpret the law on deciding the case involving the telecom major.

According to the finance ministry, the transaction between Vodafone Plc and Hong Kong-based Hutchison was not a bonafide foreign direct investment (FDI) in the country and there was no inflow of the foreign funds into the country in the transaction.

The judgment, the review petition said, had not appreciated the various clauses of the sale purchase agreement, which clearly demonstrated that it was the transfer of Hutchison's property rights in Hutch Essar Ltd in pursuance to the $11-billion deal.

"The SPA was a document which recorded the true intention of the part is to transfer control of HEL from HTIL to Vodafone and that the SPA resulted in an extinguishment of property rights pertaining to HEL by HTIL in favour of VIH," according to the review petition.

The tax paid by the group directly or indirectly in India is incidental on the consumer, the review petition said, adding that these are totally unrelated to the core of the matter - that is the tax liability arising from the overseas transaction relating to Indian operations of Hutch Essar.

It had sought the setting aside of 20 January judgment on the ground of non-consideration of the contentions raised by it.

Vodafone had appealed against the 2008 high court verdict on the ground that India could not impose taxes on a transaction made between non-Indian companies outside the country.

The deal was between Vodafone International Holdings BV, a Dutch subsidiary of the British firm and CGP Investments, a Cayman Islands company, which held the Indian telecom assets of Hutchison.

The government, in its 16 March budget, proposes to amend the Income Tax Act to levy capital gains tax on domestic asset acquired through merger and acquisition deals involving foreign companies.

The Finance Bill 2012 has made provisions in income tax laws to provide for retrospective effect from 1962 to allow the government to tax income ''accruing or arising directly or indirectly through the transfer of capital asset situated in India''.

Finance minister Pranab Mukherjee, however, made it clear that the move to amend the IT Act with retrospective effect was to bring overseas mergers and acquisitions of Indian assets under the tax net and was not Vodafone-specific.

The move, he said, was more defensive and was intended to ward of any court threat to the tax authorities over any such overseas deals.