The finance ministry today said British telecom giant Vodafone "chose to ignore" the advice of tax department that its acquisition of Hutchison stake in the Indian telecom company Hutchison-Essar was taxable in India.
Incidentally the statement, which is in response to a media report, comes a day after Vodafone group CEO Vittorio Colao called on finance minister Pranab Mukherjee to discuss issues concerning India's decision to amend the Income Tax Act with retrospective effect and its possible impact on Rs 11,000 crore tax demand.
"Vodafone cannot say that it had received no communication from the tax department, about the chargeability of the transaction to tax in India.
"Further, it chose to ignore the advice, received before the conclusion of the transaction, that Vodafone or HTIL (Hutchison Telecommunication International Ltd) should approach the Assessing Officer...for determining the exact tax liability in India," said the Central Board of Direct Taxes (CBDT), tax collection wing of the finance ministry.
The first notice in the transaction relating to sale of 66.98% stake of Hutchison Essar Ltd (HEL) was issued on March 15, 2007 in which the company was asked to submit certain details regarding the transaction between HTIL and Vodafone Group in February the same year.
Eight days later, CBDT said, another notice was served on HTIL clearly mentioning the capital gains were chargeable to tax in India and in case, parties had different view, they could approach the assessing officer.
"This advisory of the tax department was conveyed to the parties concerned, that is, to Vodafone Group and to HTIL. This has been confirmed by HEL in writing through their letter dated 5th April, 2007," CBDT said.
The proposal to amend the Act of 1961 with retrospective effect could neutralise the victory secured by Vodafone in the Supreme Court in the Rs 11,000-crore tax dispute case.
The tax pertains to purchase of Hutchison's stake in Hutchison-Essar by Vodafone for USD 11.2 billion in 2007 through a deal in Cayman Islands.
Worried over the impact of the proposed retrospective amendment on the company, Dutch unit of Vodafone had served a legal notice to the government threatening to drag India to international arbitration on the issue.
Vodafone sent the notice to Prime Minister's Office, with copies marked to Mukherjee, law minister Salman Khurshid and telecom minister Kapil Sibal, claiming the proposed law violated the international legal protections granted to Vodafone and other international investors in India.
Vodafone has served the notice of dispute invoking an investment treaty between India and the Netherlands in connection with tax liability.