India: Supreme Court sets aside Bombay HC verdict on Vodafone-Hutchison deal

New Delhi, Jan 20 (PTI) In a major victory to Vodafone International Holdings, the Supreme Court of India today set aside the Bombay High Court judgement asking the company to pay income tax of Rupees 110.0 billion (about USD 2.2 billion), holding that tax authorities do not have jurisdiction on an overseas transaction. A three-judge bench headed by Chief Justice S H Kapadia held that the Income Tax Department has "no jurisdiction" to levy tax on overseas transaction between companies incorporated outside India. Justice K S Radhakrishnan, who wrote a separate judgement, concurred with the findings of the Chief Justice and Justice Swatanter Kumar saying the companies (Vodafone and Hutchison) are incorporated outside and their transaction outside India has "no underlying nexus" with tax authority here. "Vodafone has no obligation under section 163 clause 1 (c) of Income Tax Act," Justice Radhakrishnan said. The court asked the IT department to return Rs 25.0 billion (about USD 0.5 billion) deposited by Vodafone, in compliance of its interim order, within two months along with 4 per cent interest from the date of withdrawal of the money by the tax department. It also asked Supreme Court registry to return within four weeks, the bank guarantee of Rs 85.0 billion (about US. 1.7 billion) given by the telecom major. Through the USD 11.2 billion deal in May 2007, Vodafone acquired 67 per cent stake in the Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in Netherlands and Cayman Island. Reacting to the judgement, Abhishek Manu Singhvi, one of the senior advocates who appeared in the case, said "We are happy with the Supreme Court order. It has minutely gone through the case and come to a conclusion. Irrespective of the result it is a tremendous victory for Indian judicial System" Earlier, Vodafone had moved the apex Indian court challenging the Bombay High Court judgement of September 8, 2010 which had held that Indian IT department had jurisdiction over the deal. The IT Department maintained that since capital gains were made in India through the deal, Vodafone was liable to pay the tax and issued a show cause notice to it asking as to why it should not be treated as a representative assessee of the Vodafone International Holding. Vodafone, however, challenged the show cause notice before the Bombay High Court saying it was share transfer carried outside India. The appeal was rejected by the high court in December 2008 which was challenged by Vodafone before the apex court. The Supreme Court had also dismissed Vodafone's appeal in January 2009 and directed IT Department to decide whether it had jurisdiction to tax the transaction. However, it had in addition observed that Vodafone would be at liberty to challenge the IT department's decision if it went against Vodafone and the question of law would also be open. The IT Department passed an order in May 2010 and held that it had competent jurisdiction to treat Vodafone as an 'assessee in default' for failure to deduct tax at source. This decision of the IT department was challenged by Vodafone before the Bombay High Court. The High Court, by its September 8, 2010 judgement, dismissed Vodafone's petition and held that "the essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India". It was challenged by Vodafone before the Supreme Court on September 14, 2010. Reacting to the ruling, UK-based Vodafone Group Plc, the parent company of Vodafone Essar, hailed the Supreme Court's judgment to set aside the Bombay High Court verdict asking the company to pay income tax of Rs 110 billion. Vodafone which is the second largest telecom operator in India, said the judgment underpins its confidence in the country. "We welcome the Supreme Court's decision, which underpins our confidence in India. We will continue to grow our Indian business - including making significant investments in rural areas and in 3G network coverage - for the benefit of Indian consumers," Vodafone CEO Vittorio Colao said in a statement. Further, the company said,"Vodafone has maintained consistently throughout the legal proceedings that this transaction was not taxable and we are pleased with today's judgment in the Supreme Court." "We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system...," Colao added. In the meantime and in wake of the judgment, concerned over its revenue implications, India's Finance Minister Pranab Mukherjee today held consultations with the country's Law Minister Salman Khurshid and senior officials. "Right now we only know that is a unanimous judgement that has gone against the revenue authorities .... We have to examine. We obviously need revenue for government's important programmes and the other thing is the certainty in law -- we have to examine both areas," Khurshid told reporters after the meeting here. The ruling is important because it will have implications on various cross-border deals. PTI