Bombay High Court dismisses Petition of Vodafone challenging Tax Notice

AIT News Network
MUMBAI. 3rd December 2008.

Dismissal of Petition filed by Vodafone in Bombay High Court reported by allindiantaxes vide AIT-2008-447-HC has come as a bad News for Tax Consultants who advised their clients against paying tax on merger & acquisition deals.

Vodafone bought the 67 per cent stake held by Hutchison and Hutch is now Vodafone.

The income tax department, Director(International Taxation) had issued a show-cause notice to Vodafone-Essar asking it as to why it should not be treated as assessee in default for not deducting tax at source(TDS) while making payment for the 11.1 billion dollar deal and why tax should not be levied on the company.

According to Income Tax Department Vodafone should have deducted tax at source before making payment to Hutchison and deposited it in the kitty of the government.

But the dismissal of Petition of Vodafone by Mumbai High Court has given a big weapon in the hands of income tax authorities who are going to issue notices in all cases of merger and acquisitions as in most of the cases companies have not paid tax on capital gains acting on the advice of their High Profile Consultants who may now have to look for a cover by commenting that they should await the decision of SLP to be filed by Vodafone in Supreme Court against  Bombay High Court Ruling dated 3rd December 2008.

Knowing that they are on a weak wicket; none of the Companies who did not pay tax on merger and acquisition deals; sought the ruling of Authority for Advance Rulings before taking a decision against payment of tax. Even their Consultants were shy of advising them for moving before the Authority for Advance Ruling. India has seen over 500 merger and acquisition deals recently.

Any amount of tax planning is legal but when one acts on opinion of a tax consultant ; opinion of the best consultant can be wrong if the issue is highly debatable.

 Bombay High Court has ruled that the show cause notice issued by income tax department to Vodafone International Holdings cannot be termed extraneous or irrelevant or erroneous on its face or not based on any material at all.

A perusal of the show cause notice, the chronological list of dates and events, clearly reveals that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements. Based on the above, the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source, can be determined.

 "Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s).In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman Island Company, but the assets (as stated supra) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.

The present Petition totally lacks particulars as to the nature of agreement dated 11^th February, 2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner. The essential facts supported by the necessary documents as proof of such facts, have been conveniently kept away from this Court.

the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before second Respondent or even before us. Without the said agreement and other relevant documents, it will be impossible for us to find out the true nature of the transaction. Inspite of repeated demands by the Respondents, the same have not been produced, leaves us with no option but to draw an adverse inference against the Petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner.

The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act.

The Petitioner has admitted that HTIL has transferred their 67% interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be taken before the tax authorities in India and a different stand cannot be put forth by either HTIL or the Petitioner.

Petitioner has wilfully failed to produce the primary/original agreement dated 11th February, 2007 and other prior and subsequent agreements/documents entered into between the Petitioner and HTIL. In the absence of all relevant agreements and documents, it will be impossible to appreciate the true nature of the transaction. We agree with Mr.Parasaran, that in the absence of the said agreement and other relevant documents, constitutional validity of Income Tax provisions cannot be gone into.

the Petitioner has not been able to demonstrate the show cause notice to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts, by issuing a show cause notice. 

Petitioner’s rights are adequately safeguarded under Section 195(2), 195(3) and 197 of the Income Tax Act, and the only thing required to be done is to file an application before the Assessing Officer under those provisions."

Vodafone-Essar  filed a writ petition in the Bombay High Court challenging the notice issued by the income tax department claiming that it is not liable to pay tax on the deal.

Bombay High Court vide a ruling pronounced in open court on 3rd December 2008 has dismissed the Petition filed by Vodafone and as a natural corollary Income Tax Department can go ahead with the adjudication of show cause notice issued to Vodafone demanding tax from it.

 Click here for Full Text Judgment