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New Delhi, Jan 23 In an oral order the Supreme Court today asked Vodafone International Holdings to answer the show-cause notice that had been issued to it by the Income-Tax (I-T) Department. The apex court has disposed of Vodafone’s special leave petition at the admission stage itself. The written order is awaited.

Vodafone International had challenged the I-T Department’s jurisdiction to assess withholding tax over offshore transactions involving assets in India and refused to respond to the notice. Its writ petition before Bombay High Court was dismissed in early December 2008, prompting the company to approach the apex court through a special leave petition.

The apex court today left it to the I-T assessing officer to decide the jurisdiction issue. However, Vodafone is understood to have been allowed to fast-track any appeal against the I-T assessing officer’s order by going directly to the High Court, instead of going through the normal channel of departmental appeals process.

The Bench comprising Mr Justice S.B. Sinha and Mr Justice M.K. Sharma declined to hear Vodafone’s appeal which the company had filed after the Bombay High Court had in December 2008 dismissed Vodafone’s writ petition. The writ petition had challenged the I-T Department’s jurisdiction to assess withholding tax arising out of Vodafone’s acquisition of a controlling stake in Hutchison Essar.

Netherlands-based Vodafone International Holdings had in February 2007 bought a 67 per cent stake in Hutchison Essar from Hutchison Telecom International (HTIL) for $11.2 billion. The assets it purchased, however, were in India.

While expressing displeasure that Vodafone had not produced the copy of the sale agreement before the apex court or even to the High Court, the Bench today asked Vodafone to “go and respond” to the show cause notice, stating that it was important.

Meanwhile, a Vodafone statement issued today said “given the fact that the petition filed by Vodafone involves important questions of jurisdiction, the Honourable Supreme Court of India has asked the tax authorities to decide, as a preliminary issue only, whether it has jurisdiction to proceed against Vodafone (and no other issues).

Should Vodafone be aggrieved by the order of the tax authorities’ preliminary adjudication on jurisdiction, Vodafone has been permitted to again directly approach the High Court.”

Reacting to the apex court’s move, Mr Rajendra Nayak, Partner, Ernst & Young, told Business Line that the “outcome is back to square one for both parties”. The Supreme Court has not decided on either side and remanded the matter to the tax authorities, he noted.

“In a very narrow sense, it is a victory for the tax department. This is because the apex court has upheld the department’s action of issuing notice to Vodafone,” Mr Nayak said. On the implication of the Vodafone tax litigation on other cross-border deals, Mr Nayak said that investors should be cautious in managing the tax risks in cross-border mergers and acquisitions.

“The notices of the tax department to Vodafone and other cases have created uncertainty on the taxation front. This will have some bearing on future cross border M&A deals,” he said.

The Income-Tax Department estimates that tax deducted at source (TDS) amounting to about $2 billion had not been paid to the exchequer in the $11.2-billion Hutch-Essar deal. The judicial pronouncements till date on the Vodafone matter has strengthened the department’s hands in looking at other offshore transactions/cases involving transfer of assets situated in India, tax experts said.

More Stories on : Telecommunications | Taxation | Courts/Legal Issues

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