Supreme Court dismisses Vodafone's plea against IT department

23 January 2009

The Supreme Court today turned down a Special Leave Petition by Vodafone International BV, the Netherlands-based telecom giant challenging the Income Tax department's show cause notice on its $11 billion overseas acquistion of Hutchinson Essar.

The notice of September 2007 asked  Vodafone to pay $1.7 billion as capital gains tax for the acquistion of its stake in  Hutchison Essar (now Vodafone Essar).

Vodafone filed a writ petition in the Bombay High Court on January 28, 2008 challenging the show cause notice.

According to Vodafone, as it had acquired the entire share capital of non-resident company CGP (Holdings) from HTI (BVI) Holdings, a foreign company having no presence in India, the share capital purchase was paid outside India without deducting tax at source.

The Bombay High Court, in its order, upheld the Income Tax department's contention and ruled that the transaction of purchase of shares by the company in Cayman Islands was chargeable to capital gains tax in India.

However Vodafone in its petition to the apex court contended that,"Section 9 (1) of the Income Tax Act merely provides that income accruing or arising from the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. There is no legal fiction deeming the transfer of a capital asset (taking place outside India) to take place in India".

Income Tax department officials said that the key to taxability was jurisdiction. IT department's former director general G C Srivastava said, "Issue of jurisdication relates to chargeability of income to tax".