Taxing times: Vodafone Essar to contest tax claim

NEW DELHI: Vodafone’s purchase of a majority stake in Hutchison Essar for $11.2 billion may engender a long legal battle with Indian tax authorities over alleged non-payment of taxes.

Vodafone-Essar on Friday will file its reply to the income-tax department’s showcause notice asking “why it (Vodafone Essar) should not be treated as an agent of Hutchison International”.

Sources said that Vodafone Essar, in its reply, will tell the government that “it believes there is no substance in the claims of the I-T department for capital gains tax that it allegedly owes”.

Vodafone has also pointed out that the Indian unit (Vodafone Essar, erstwhile Hutchison Essar) did not qualify as an agent of the non-resident (Hutchison International) under Section 163 of the Income-Tax Act, 1961.

The I-T department has also sought advice from various legal experts. Thereafter, the department had served a showcause notice to Vodafone Essar. Thus, the company’s reply may not satisfy the department, which is unlikely to give up a tax claim, around $1.7 billion, so easily. The notice has been sent to Vodafone Essar since Hutchison International has no presence in India.

Hutchison, which is the recipient of the payment from Vodafone, has the primary responsibility of paying capital gains tax, if any. But, since the I-T department has no access to Hutchison, it has issued notice to Vodafone Essar on the grounds that the latter was Hutchison’s agent in India at the time of the transaction.

The situation has got complicated further by the fact that Vodafone Essar will have to respond to the I-T department. Sources say the I-T department’s legal strategy will be to ask Vodafone to deposit TDS. The capital gains tax on transactions involving unlisted companies is 20%.

Vodafone Essar’s reply provides legal justification as to why the Indian unit can be treated as a subsidiary of the non-resident, but not an agent. The reply also contains the legal opinion the company had obtained as to why no capital gains tax is payable either by Vodafone Essar or any group companies.

It also points out that since the transaction between Hutchison International and Vodafone was structured through Mauritius, it could not attract any tax in India.

ET had first reported in August that the I-T department had served a showcause notice on Vodafone Essar as it was confident that the Hutchison International-Vodafone transaction would attract capital gains tax in India under Section 9(1)(i) of the I-T Act.