The Telegraph
Saturday , March 1 , 2014
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Status quo on truce talks with Vodafone


New Delhi, Feb. 28: The cabinet today asked the finance ministry to continue conciliation proceedings with Vodafone on the capital gains tax dispute related to the company’s acquisition of Hutchison Whampoa’s stake in Hutchison Essar in 2007.

The government also asked the revenue authorities to stick to its stand of not clubbing the capital gains tax case with a transfer pricing row, as demanded by Vodafone.

The finance ministry had sought the cabinet’s permission to break out of the conciliation talks with Vodafone after an impasse.

If allowed, the ministry could have taken over Vodafone’s assets to pay for the dues that could run into Rs 20,000 crore, including penalty and interest.

Officials said the cabinet did not want to rush into such heavy-handed dealing with Vodafone as the British government had been lobbying for an amicable settlement. Not only will it cause a rift in relations but also send a negative signal to foreign investors.

The Income Tax Appellate Tribunal is expected to hear the transfer pricing case on March 19.

The transfer-pricing case concerns Vodafone’s issue of shares in its Pune-based BPO arm Vodafone India Services to Vodafone Teleservices Mauritius for Rs 246.38 crore in 2007-08, which according to the income tax department, was undervalued. The tax, along with penalties, works out to more than Rs 1,300 crore, officials said.

The attempt at a conciliation on the capital gains dispute came after a five-year slugfest in courts that produced an adverse verdict for the revenue department.

The tiff arose over the revenue department’s move to gouge out $2 billion in taxes from an $11.2-billion deal between two overseas entities —Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate companies — while selling the Indian arm of Hutch to Vodafone in 2007.

The revenue department demanded tax deducted at source, which a buyer is supposed to deduct from any payment made to a seller and deposit it with the government.

The Supreme Court in 2012 struck down a Bombay high court judgment upholding the tax demand as the sale was struck in a tax haven.

The finance ministry brought a retrospective amendment which said the tax claim on a deal involving the sale or purchase of assets in India is also applicable for overseas pacts.