By Joe Leahy in Mumbai
Published: July 10 2008 03:20
A landmark court case between Vodafone of the UK and the Indian tax authorities is set to move to the Supreme Court in New Delhi, India’s top judicial body, in a battle that will determine the shape of mergers and acquisitions in the country.
The two sides on Wednesday rounded up their arguments in Mumbai’s High Court and are due to offer written submissions by next Friday on the case, in which the government is trying to tax Vodafone $2bn on its takeover last year of Indian mobile carrier Hutchison Essar. The Mumbai High Court is expected to take weeks to deliver a verdict but both sides have pledged to appeal to the Supreme Court if they lose the case.
“If we lose, we’ll go. If they lose, they’ll go – in any case, this matter will go to the Supreme Court,” said a lawyer familiar with the tax department’s case.
Vodafone’s acquisition last year of a 67 per cent stake in Hutchison Essar, India’s fourth-largest mobile operator, from Hong Kong’s Hutchison group for $11bn was the largest foreign direct investment in the country. However, the transaction quickly ran into headwinds after the government demanded to know why Vodafone had not withheld tax on the sale on behalf of the state even though Hutchison, as the seller, was the company that made the capital gains.
Vodafone challenged the claim in a petition to the Mumbai High Court, arguing that the transaction took place between overseas arms of the UK and Hong Kong groups and therefore was not taxable in India.
Under the Hutchison Essar sale, a Dutch company controlled by Vodafone paid the $11bn to a Cayman Island entity run by Hutchison, for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator.
The government argued during the Mumbai hearing, which started last month and ran for a week and a half, that since Hutchison Essar’s assets were all in India the notion that the transaction took place overseas was “a legal fiction”.
But Vodafone said the capital assets, the shares, were transferred between foreign entities in an overseas jurisdiction and therefore bore no tax liability in India. It also said that even if the transaction was taxable, the tax authorities should first proceed against Hutchison.
The Vodafone case is being closely watched by other foreign companies. The tax department has also contacted Genpact India, an outsourcing company, to seek facts surrounding the sale by its former controlling shareholder, General Electric, of a large stake to two private equity firms in 2004.
Copyright The Financial Times Limited 2008