When $2.1 billion is at stake, one shouldn’t be surprised if someone shows the urgency that Vodafone is showing. It began its argument in earnest in the Bombay high court on Monday by strongly opposing against ,”an imposition of penalty” . Vodafone International Holding is challenging the show cause notice issued last September to it by the Income Tax department in Mumbai for its approximately Rs 8,000 crore tax liabilities.
The seriousness of the situation can be gauged from the fact that the Vodafone legal team almost filled the courtroom. It did not end at that. There were foreign representatives present too!! [Boy! It seems like Vodafone is determined to make IT department pay through its nose for this one time].
Actually the story goes like this. The Hutch deal took place between Hutchison Telecommunications International Limited and Vodafone International .Hutchison Telecommunications International Limited is a company registered in Cayman Islands, Mauritius while Vodafone International is registered in the Netherlands. Now India has a tax treaty signed with Mauritius which [As far as I know] allows for an exemption of Capital Gains Tax on any long term capital gains made by any entity [company or individual] registered in Mauritius. So Hutchison Whampoa [ the parent company of Hutchison-Essar] routed the acquisition through it’s Mauritius subsidiary and got the tax exemption [ which amounted to a cool approximately Rs 8000 crores!!]. Ultimately it ended up as IT departments loss with no one paying up the tax.
What has raised many a eyebrows is the size of the deal. With the overall deal [for a 66.67% stake in Hutchison Essar] valued at almost $12 billion [approx 48,000 crores], the Hutch deal was the largest ever FDI inflow into India. And a deal of such an enormous magnitude escaping the tax-net has not gone well with IT department.
Meanwhile, the Vodafone Counsel has said that the amendment to the I-T Act by the Finance Act 2008 is unconstitutional. The amendment imposes retrospective penalty on capital gains tax claimed by the I-T department. Not to be stopped at that alone, Vodafone has even threatened to approach international court if HC rejects its plea. Looks like the HC is set for some sizzling action in the coming days!