THE Indian tax authorities had advised British telecom major Vodafone to pay tax on its $11-billion acquisition of Hutchison Essar before it sealed the transaction, according to a recent income tax order. In a letter on March 23, 2007, the Income Tax (I-T) department had asked Vodafone to pay withholding tax, nearly one-and-a-half month before the telco made the payment to Hong Kong-based Hutchison International for buying two-third stake in Hutchison Essar. 

But according to a Vodafone spokesman: “The legal advice Vodafone has received, both during and after the acquisition, is unanimous. There is no tax to pay on this transaction. Vodafone will continue to defend its position vigorously.” Vodafone executed the deal on May 8, 2007, a day after it received the approval from FIPB, without complying with the withholding tax liabilities.

The I-T department mentioned in its last week’s order: “Neither the tax was deducted at source nor was any application made before the assessing officer under Section 195 (2) of the Act”. On May 31, the department claimed that it had the jurisdiction to tax Vodafone’s acquisition of Hutchison Essar in 2007. The tax liability of Vodafone is around Rs 12,000 crore, according to the tax authorities.

The I-T order also referred to an advice given to Vodafone by Ernst & Young (E&Y) wherein the consultancy firm had said the telco should provide for warranty against unforeseen tax consequences. E&Y’s assignment was to value the assets of Hutchison Essar, the I-T report said.

An E&Y official told : “The E&Y advice was not in relation to the $11-billion acquisition of Hutch Essar. This was about the probable tax liabilities of the companies Vodafone was planning to acquire in India.”

Vodafone, last week, moved the Bombay High Court challenging the I-T department’s jurisdiction to levy tax on the transaction.

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