New Delhi, Sept. 27: The Supreme Court today refused to stay Bombay High Court’s order issued earlier this month, which upheld a Rs 12,000-crore tax tab served on Vodafone that arose from the acquisition in early 2007 of a controlling interest in Hutchison Essar (since renamed as Vodafone Essar).

The apex court also directed the tax officials to calculate Vodafone’s tax in four weeks’ time and issue a notice. The next hearing is on October 25.

Vodafone will have to pay the liability, including interest, pending disposal of the case, said the three-judge bench headed by Chief Justice S.H. Kapadia.

“The Indian tax authorities will raise the formal demand with Vodafone within four weeks,” S.S.N. Moorthy, chairman of the Central Board of Direct Taxes, said.

Tax officials said the total liability was around Rs 12,000 crore, including around Rs 8,500 crore in capital gains tax and Rs 3,500 crore as interest. “This does not include penalty which can be charged under section 201, which is calculated as a percentage of total tax liability,” the officials added.

Analysts said the penalty clause was subject to “view and interpretation” of the facts of the case and in cases where “penalty is debatable, it is not usually levied”.

The CBDT will calculate the final tax liability amount within the next four weeks and submit the same to the Supreme Court.

On Vodafone counsel Harish Salve’s plea seeking a stay on the high court’s judgment on the tax claim, the Supreme court said Vodafone would have to deposit a part of the tax demand amount first.

“If you want a stay on the high court judgment ... you have to pay part of the amount. The choice is yours,” the bench said, while asking the counsel not to press for the stay.

Bombay High Court had upheld the jurisdiction of the I-T department to raise a tax demand under section 195 of the income tax act on Vodafone International Holdings BV — the Dutch subsidiary that signed the stake deal with Hutchison Telecom International Ltd .

Section 195 obliges a person or entity making a payment to an overseas entity to deduct a withholding tax. The onus is on the entity to determine whether it is liable to make the deduction and turn it over to the government. If it isn’t sure, it must consult the tax officials.

However, the high court did not express a view on the issue of slapping a penalty on Vodafone under section 201 for failure to deduct the tax. It left this question open and had said Vodafone was free to contest this “before the tax authority”.

Vodafone had held back a sum of $352 million from the $11.08-billion payout for the 52 per cent direct controlling interest it acquired in Hutchison Essar. This sum forms part of a tax covenant that Vodafone International BV reached with Cayman Island–based Hutchison International.

Vodafone can use this corpus to pay any tax liabilities relating to the transaction. If it doesn’t have to dip into it, Vodafone must return the sum to Hutchison after a period of 10 years.

Claims clash

The tax authorities contend that the Vodafone deal was liable to be taxed for capital gains as the assets of the acquired company were based primarily in India.

Vodafone, however, maintains that it does not have a tax liability and “would take necessary action to defend its position”.

The Indian authorities claim that Vodafone International, which executed the deal on behalf of Vodafone Group, failed to withhold tax while paying Hutchison Whampoa for the 67 per cent stake it bought from the Hong Kong-based company.

According to Vodafone, it is not obligated to pay taxes, as the transaction took place on foreign soil between the Netherlands-based Vodafone International and Hong Kong-based Hutchison and the stake Vodafone acquired was owned by a Cayman Islands-based holding company.

“We firmly believe that this transaction is not subject to tax in India. Furthermore, as Vodafone is the acquiring company, we have clearly not made any capital gain on the sale. We will continue to take whatever actions necessary to defend Vodafone's position as the matter proceeds,” Vodafone said in a statement today.

Moorthy had said last week that Vodafone-like deals were being probed, and a good number of charges were being finalised to ensure the government did not lose its legitimate revenues.