Vodafone Loses In Mumbai High Court

by Mary Swire, Tax-News.com, Hong Kong

13 September 2010

UK telecoms giant Vodafone has expressed continuing confidence that it is not liable for Indian capital gains tax from its purchase of the Indian mobile phone network Hutchison Essar in 2007 despite a setback in the Mumbai High Court.

The Mumbai High Court ruled that the Indian tax authorities did have jurisdiction to impose tax on the transaction because the operating assets of the company under sale were in India. Vodafone’s counsel has announced that the company is to make an appeal to India’s highest judicial body, the Supreme Court in New Delhi.

Vodafone is being chased for over USD2bn in unpaid capital gains taxes relating to its USD11bn purchase of Indian operator Hutchison Essar from Hong Kong based Hutchison Telecommunications International Ltd (HTIL) in 2007.

Vodafone argued that it was the buyer, and the capital gains tax liability should be assessed against the seller HTIL, and further claimed that since the sale took place between foreign entities no tax liability should have been incurred in India. The Vodafone/Essar deal was structured so that Vodafone International Holdings, a Dutch-registered subsidiary of Vodafone Group, paid USD11bn to a Cayman Islands-registered subsidiary of HTIL, in order to acquire a 52% stake in Hutchinson Essar and a further 15% was acquired from two Indian shareholders. Commentators are speculating from wording in the judgement that the 15% stake may have to be considered separately from the 52% stake.

The developments are being watched carefully as similar capital gains tax claims affecting offshore transactions are in the pipeline for which the Vodafone case will act as precedent. These include the sale in 2004 of General Electric’s outsourcing company, Genpact India.

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