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Vodafone To Challenge Indian Tax Rules

by Lorys Charalambous,, Cyprus

25 June 2008

Telecoms group Vodafone has this week taken the next step in its ongoing dispute with the Indian tax authorities over a USD2bn tax bill, following its purchase of a a majority stake in Hutchison Essar, India's fourth largest mobile telephony firm, from Hong Kong based Hutchison Telecommunications International Ltd (HTIL).

The dispute arose over a capital gains tax demand imposed on the company as a result of the transaction, with Vodafone arguing that, since it was the buyer, the capital gains tax liability should be assessed against HTIL.

However, experts familiar with the case suggested that the Indian Income Tax Department had served the bill on Vodafone due to the complex company structure through which the deal between Vodafone and HTIL was carried out. It is believed that the purchase may have been arranged via an offshore subsidiary in Mauritius, with Vodafone-Essar acting as an 'agent' in the deal.

Earlier this year, Indian tax law was amended (retroactive to 2002) to oblige firms to withhold taxes when undertaking such transactions.

Vodafone last week announced that it would oppose the changed law, and had submitted an amended writ petition to the Bombay High Court, which resumed hearings on the matter on Monday.

According to a statement quoted by the Indian media, the telcoms firm explained that:

"Pursuant to the order passed by the Mumbai (Bombay) High Court in the last hearing of the Vodafone tax case, the company has amended its writ petition challenging the constitutionality of the retrospective amendment of the changed tax law. The revised writ was submitted to the high court on June 12."

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