The department held Vodafone liable for not deducting tax at source from payment made to Hutchison and claimed around Rs. 12,000 crore in tax and penalty in the 2007 deal.

The Bombay High Court on Wednesday dismissed Vodafone International's plea challenging the Income-tax Department's Rs.12,000-crore demand in tax and penalty on $11 billion (about Rs.50,000 crore) takeover of Hutchison Telecom, a judgment that could impact foreign companies buying assets involving India firms.

The court, however, gave liberty to Vodafone to argue before the tax department that no penalty should be imposed as it genuinely believed it had no liability to deduct tax at source.

Incidentally, the verdict came on a day when British firm Cairn Energy said it would pay all taxes due, both in India and the U.K., on the $8.48 billion (about Rs.39,000 crore) sale of a majority stake in its Indian arm to London-listed Vedanta Resources.

Vodafone, through its group firm Vodafone International Holdings, in 2007 bought Hutchison Telecommunications India's (HTIL) stake in Hutchison Essar for over $11 billion. Indian conglomerate Essar holds about 33 per cent stake in Vodafone India. The IT department held that Vodafone liable for not deducting tax at source from the payment made to Hutchison and claimed around Rs.12,000 crore in tax and penalty on the deal.

A division bench comprising Justice Dhananjay Chandrachud and Justice J P Deodhar held that IT Department had the jurisdiction to tax the transaction.

The moot question before the court was whether IT department can ask a foreign company to pay tax in India if it takes over another foreign entity that owns an Indian subsidiary, and particularly so, if the deal is made outside India?

While the IT department contended that the transaction was liable for tax payment in India,

Vodafone International Holdings contended that both the seller and the buyer were foreign companies and that the deal was made outside India.

Reacting to the verdict analysts said it would make foreign players more “cautious” while making investments in India.

The court refused to stay its order to enable the petitioners file an appeal and allowed the proceedings to continue before the tax department. The judges, however, said that the department would not give its order until eight weeks.

Vodafone submitted that in the past, similar transactions have not been held eligible to taxation in India and that the Indian revenue authority has been stating through the media that the transaction in issue is a “test case“.

The IT affidavit said that Hutchison Telecommunications International Ltd (HTIL), through its investments in India, had made substantial gains which were chargeable to tax under the provisions of the Income Tax Act 1961. HTIL held 66.98 per cent direct and indirect interest in Vodafone Essar Ltd (previously known as Hutchison Essar Ltd), which had telecom licenses to operate across India under the brand name Vodafone (formerly Hutch).

Justice Chandrachud pronounced the operative part of the verdict in Mumbai High court while Justice Deodhar, currently on an assignment at Nagpur bench, was at the other end of the video conference link.

Another report from Delhi adds

Seeking legal advice

Vodafone on Wednesday said it was seeking legal advice to challenge the Bombay High Court order.

A statement from Vodafone said the High Court had directed the tax authorities not to raise any final order for a period of eight weeks, which provides Vodafone time to review the judgment in detail and consider its next steps, “which includes the option of an appeal to the Supreme Court“.