The Bombay High Court's landmark verdict holding Vodafone International liable to pay R12,000 crore in tax and penalty on their $11 billion (about R50,000 crore) takeover of Hutchison Telecom has serious implications for such takeovers in future.
The verdict is important for more than one reason. First, it holds a foreign company liable to pay tax in India for takeover of another foreign entity owning an Indian subsidiary, even if the deal is made outside the territorial jurisdiction of India. It clears the air on this vexed issue.
Secondly, after the Supreme Court upheld the validity of the double taxation avoidance treaty between India and Mauritius, many companies had been taking the Mauritius route for investment in India to avoid capital gains tax on transactions, which are otherwise taxable by Indian revenue authorities.
The verdict would discourage foreign direct investment (FDI) through tax havens, as companies would now be more cautious in their approach, said Supreme Court advocate Gaurav Bhatia.
"India would continue to be an attractive investment destination because of its market size and the opportunities it offers to foreign firms," he said.
Thirdly, it has huge revenue implications.
Central Board of Direct Taxes acting chairman Sudhir Chandra on Thursday said the board is investigating more Vodafone-like deals.
"There are already some cases under investigation."
With India emerging as one of the preferred investment destinations and Vodafone-type takeovers expected to go up in numbers, tax authorities can expect more revenue from such transactions after winning this "test case".
Through its group firm Vodafone International Holdings, Vodafone bought Hutchison Telecommunications India Ltd's (HTIL) stake in Hutchison Essar in 2007 but did not deduct tax at source as required under provisions of the Income Tax Act.
Vodafone had contended that the transaction could not be taxed, as both the seller and buyer were foreign companies and the deal too was made outside India.
Agreeing with the Income Tax Department's arguments, the high court held that the transaction in question had "sufficient territorial nexus to India". Vodafone was at fault in not deducting tax at source, it added. Interestingly, the court used various documents signed between the two companies to establish the territorial nexus.
Out of the R12,000 crore due from Vodafone, only R8,000 crore is towards tax liability and the rest is penalty. The court has given liberty to Vodafone to plead before the IT Department to waive the penalty off on the ground that the company "genuinely" believed it had no liability to deduct tax at source.
But the final word on this contentious issue is yet to come, as Vodafone is bound to challenge the Bombay HC verdict in the Supreme Court. But till such time, the high court verdict is the law of the land.
Former Chief commissioner of Income Tax and Supreme Court advocate Shivakant Jha said: "It is an accurate interpretation of law on this point and settles the controversy on good grounds. This would check instances of foreign companies attempting to circumvent provisions of law to evade tax in India."