Vodafone to Appeal Indian Court Ruling

Vodafone, one of the world’s leading telecommunications companies, recently announced that it would appeal a $2.6 billion tax bill issued by an Indian court.

According to the Associated Press, the Bombay High Court ruled that the company owed taxes on an $11 billion transaction in which a Dutch subsidiary of Vodafone purchased a 67 percent stake in CGP Investments, a company based in the Cayman Islands. CGP, a subsidiary of Hutchison Telecommunications International, owned a variety of businesses, one of which was Hutchison Essar, an Indian telecommunications company whose operating assets were located in the country.

Vodafone, according to The Economic Times, notes that the sale involved the transfer of shares in a company located outside of India, which should not be taxed under current Indian law. Any capital gains taxes, Vodafone argues, should be paid by the seller, not the buyer.

The Indian tax authority, however, argued the agreement itself states that the transaction involved not only the shares of CGP Investments, but also included a transfer of rights and assets located in India. Because the source of revenue is located in the country, the tax authority believes the transaction should be taxable. The India Revenue Department further argues that because the deal involved a series of holding companies, there is an indirect connection to assets located in India, providing the jurisdictional means necessary to tax the transaction.

Other Transactions Under Scrutiny

The AP report notes that the Vodafone case has exposed weaknesses in India’s tax code, which may change when the new tax code is adopted in 2012. If the ruling of the Bombay High Court is upheld, the company would owe approximately $2.6 billion in withholdings, penalties and interest. A hearing date for the appeal is expected to be announced in late October.

Tax experts are watching the Vodafone case carefully, because they suspect many more deals with the country may come under review. The chairman of the Central Board of Direct Taxes, according to The Wall Street Journal, has noted that the Vodafone deal was a “test case” and that the department intends to review similar deals.

One company is already facing such scrutiny. SABMiller, one of the world’s largest brewers, has a case pending in India on its 2006 purchase of the Indian arm of Fosters, the Australian brewer. Similar to the Vodafone case, Indian tax authorities believe that though the deal was consummated out of the country, it involved assets located in India and taxes should be paid on the transaction. The case is still working its way through the Indian courts.