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Vodafone suffers a tax setback

New Delhi, Jan. 23: The Supreme Court today dismissed Vodafone’s appeal against the income tax department which asked the telecom firm to pay a capital gains tax of $2 billion on its acquisition of Hutchison Essar in 2007.

In September last year, the income tax (I-T) department had served a show-cause notice to Vodafone, asking why tax should not be deducted at source for its purchase of a 67 per cent stake in Hutchison Essar.

In December, Bombay High Court dismissed a petition by Vodafone International Holdings BV contesting the show-cause notice. After this, Vodafone moved the apex court with a special leave petition.

Arguing for Vodafone, senior counsel Fali S. Nariman sought a stay on the notice.

According to Nariman, the transaction had taken place overseas though the Hutch shares were in India. But a two-judge bench, comprising Justice S.B. Sinha and Justice Mukundakam Sharma, refused to accept his plea.

“Go and reply to the show-cause notice. If you are still dissatisfied with their decision, you can go to the high court,” the bench said.

Counsel for the I-T department Mohan Parasaran said his department would take a decision on the matter in three to six weeks.

Vodafone had bought a 67 per cent stake in Hutchison Essar from Hutchison Telecom International (HTIL) in February 2007 for $11.2 billion.

According to Vodafone, the I-T department had no jurisdiction over a deal between two parties incorporated overseas as it had purchased the entire share capital of non-resident company CGP Investments (Holdings) from HTI (BVI) Holdings, a foreign firm having no presence in India. The amount for the share capital purchase was paid outside India without deducting tax at source, it said.

Analysts said the transaction would attract capital gains tax in India under Section 9(1)(i) of the income tax act. According to the section, if any property located in the country is transferred, it will attract capital gains tax.

The I-T department was examining more than a dozen cases of offshore mergers and acquisitions in which the deals resulted in a change of ownership of Indian firms, sources said.

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