Vodafone challenges Indian tax law

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London, Jun 23: British telecom major Vodafone is challenging in the Bombay High Court a change in India's tax laws which have been applied retrospectively to its 11.1 billion dollar purchase of a controlling stake in Hutchison Essar.

Vodafone said in a statement on Friday that it has submitted an amended writ petition challenging the "constitutionality of the retrospective amendment of the changed tax law." A legal hearing in the Bombay High Court is due to restart on Monday, June 23 to decide on the legality of a 2 billion dollars tax bill based on the purchase of the Hutchison stake, The Independent reported.

If the tax department can show that the India based Vodafone-Essar acted as an "agent" of Vodafone in its overseas purchase (arranged via Mauritius) of Hutchison's shares in Hutchison-Essar, then it may be possible that Vodafone-Essar could be held liable for the tax demand.

When Vodafone bought a controlling stake in Hutchison Essar from the Hong Kong-based Hutchison conglomerate in May 2007, the UK group's advisors confirmed that because the deal was between two foreign companies, no tax was due to the Indian authorities. But the Indian Government does not agree, and the row is set to continue.

This week's hearing will decide on the validity of a Vodafone writ seeking an injunction against the tax authority's investigation of the deal. Whichever way the court rules, and a decision is not expected for a number of weeks, it is likely that the losing side will lodge an appeal with the Supreme Court.

The case has major implications for all foreign companies pursuing Indian assets. Vodafone's argument, and the basis of its writ, is that the company cannot owe tax on the deal because the transfer of shares took place between a Dutch group owned by Vodafone and a Hutchison company registered in the Cayman Islands, both of which are outside India's jurisdiction.

But the government says that it does have a capital gains claim because the assets are based on Indian soil.

The dispute started last year, and was complicated further by a retrospective change to the Indian tax laws in February's Budget.


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