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Indian Vodafone Tax Case Adjourned

by Mary Swire,, Hong Kong

16 May 2011

The long-running court case involving the tax liability of Vodafone’s acquisition of an Indian mobile phone company in 2007 continues, with the Authority for Advance Ruling (AAR) adjourning the case until May 24. Vodafone had filed an application with the AAR over whether tax deducted at source should be payable for the purchase of Essar.

The Counsel for the Indian Tax Office asked for the adjournment on the grounds that they were still awaiting important documentation from Essar, which would provide evidence of “dual residence” and “round tripping”. They also made the point that this was the first case of its kind, and the fact that an application had been made to the AAR.

Vodafone’s Counsel refuted this, saying that the Tax Office had been seeking adjournments since October last year, and that the case was sending the wrong signal to many foreign investors in India.

Vodafone is currently fighting an order which upheld an INR110bn (USD2.4bn) capital gains tax bill in respect of the USD11.2bn acquisition of Hutchison Telecom International Ltd’s (HTIL) stake in a Cayman Islands company, by virtue of which Vodafone acquired the Indian Hutchison Essar mobile phone network.

The matter has arisen over the jurisdiction of the Indian tax authorities to demand capital gains tax. Vodafone has maintained that there is no jurisdiction, the main agreements having been signed abroad between non-Indian entities. It has, however, come to light that a small part of the total acquisition documents involved Indian interests and were signed in India.

A statement issued from the Vodafone Group previously said that every adviser it had consulted, both during the transaction and since, were in unanimous agreement that no tax liability should arise. It said that India had not sought to tax such transactions before, and to do so would be contrary to international taxation principles, which are specifically designed to encourage foreign investment and eliminate barriers to trade”.

Vodafone is contractually obliged to make payment to Essar, without any deductions, on May 27.

TAGS: court | capital gains tax (CGT) | tax | business | holding company | India | law | mergers and acquisitions (M&A) | offshore | telecoms | triangulation

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