Vodafone tax case: Income Tax Department files caveat in HC

The Income Tax Department has filed a caveat in the Bombay High Court in the Vodafone tax case.  The caveat was filed to avoid ex-parte proceedings. Vodafone is likely to move the Bombay High Court next week. It is learnt that the Income Tax Department has issued a seven-page showcause with its final order. The showcause represents new proceedings against Vodafone and relates to representative assesses.

The notice treats Vodafone as an agent of Hutchison Telecommunications International (HTIL). It is the first time that a tax notice is treating a non-resident as an agent of another non-resident. The notice proposes substantive assessment for Vodafone under section 163 of the Income Tax Act.

The aim is to counter Vodafone arguments on tax deductible at source (TDS) liability. Vodafone said that even if the income is chargeable to tax, then it is not liable for TDS. “If courts say Hutch has tax liability, but no TDS liability for Vodafone, then notice comes in handy.” The I-T Department is trying to corner Vodafone from both TDS as well as assessment sides.

This entire case revolves around the Hutch–Vodafone deal, which was struck way back in 2007. Back then, Vodafone had acquired 67% stake in Hutchison Essar from Hutchison Telecommunications International (HTIL). The taxman said this transaction was taxable in India because the underlying asset was in India and therefore sought a capital gains tax. Vodafone’s said the I-T Department has no clear jurisdiction over the deal because Vodafone is a Netherlands company and Hutchison is incorporated in the Cayman’s Islands. Vodafone had moved the Supreme Court in January 2009, but the apex court had refused to intervene and had directed the I-T Department to revert on jurisdiction.

This order could not have come at a worse time for Vodafone which is facing intense pricing wars and fierce competition in the telecom space. It has recently been forced to write-off a staggering Rs 15,000 crore from its local subsidiaries.

The order was also drawn up on a circular issued in China last year. In December 2009, China issued the infamous circular 698, which brought all transfers of Chinese resident enterprises that were executed offshore under the tax net.

The circular said that all foreign entities must disclose details of transfers of Chinese companies to the Chinese tax authorities where such transfers are executed through an offshore structure located in a no tax or nil tax jurisdiction.

The Chinese circular asked for a variety of documentation to be disclosed to its tax authorities such as the contract between two companies, the relationship between the foreign entity and the holding company being transferred, the operations of the holding company, and most importantly why this particular holding company in that jurisdiction had been chosen to execute the transfer of shares.

Basically, the Chinese circular seeks to establish whether or not this holding company has been established and is being used for the purpose of tax evasion.

Indian tax authorities in the Vodafone case have not used the Chinese circular to seek to establish jurisdiction over Vodafone in India. However, they have used it as an example of the fact that other jurisdictions have brought Vodafone type transactions under the tax net.

Hence, the claim that Vodafone is making that this is not done in any jurisdiction anywhere else in the world is incorrect.