Apex court asks I-T department to hold off Vodafone penalty

NEW DELHI: The Supreme Court on Friday asked the income tax department not to impose penalties on Vodafone until an order is passed in this case after hearings in July. The court also allowed the tax office to continue with the case. The apex court bench headed by Chief Justice SH Kapadia asked the telecom major to appear before the income tax department to explain its position on the department's notice seeking imposition of penalty for its alleged failure to deduct tax at source on its stake purchase in Hutchison-Essar.

"No steps would be taken to enforce a penalty if imposed on the petitioner (Vodafone)", the court said. It, however, asked the company to explain its position to the department as only a show cause notice was issued. "They (I-T department) are asking you (Vodafone) to appear only. You go and appear and put your representation their. Let them pass order" , the court said. Vodafone had in 2007 purchased 67% stake of Hutchison in Hutchison-Essar for more than $11 billion. The income tax department had raised a demand of about $1.7 billion on the company for its alleged failure to deduct the tax at source for such transaction.

Vodafone has always maintained that under existing Indian laws, it is not required to withhold tax on the deal because the transaction took place in the Cayman Islands and both the buyer and seller were foreign. Following the Supreme Court directive, Vodafone said the company was a victim of reinterpretation of tax laws. "The company is surprised by the tax office's actions , especially as Indian law precludes the tax authorities from imposing penalties in cases where the assessee has acted on reasonable legal advice in view of past tax precedent in India or the issue of imposition of tax is being decided for the first time by courts of law in India," the telecom giant said in a statement.

Vodafone also added that 'established tax laws are being reinterpreted in a completely new way and there were no previous examples of such taxes being imposed in India on an overseas share transfer such as this. The I-T department had also on March 23 wanted to penalise Vo d a fo n e International, the holding company of Vodafone Essar, for its failure to present Cayman Island income tax returns and certain other documents. The I-T department had asked for these documents between January and October 2009.
The court in its interim order had directed Vodafone to deposit Rs 2,500 crore with the apex court registry and a bank guarantee of Rs 8,500 crore in the tax case. It will come up for hearing before the court after summer break on July 19. Vodafone had moved the apex court seeking its adjudication on the issue of whether Indian tax authority has jurisdiction to tax Vodafone's $11.2-billion purchase of 67% controlling interest in Vodafone Essar, then known as Hutchison Essar in February 2007. Hutchison controlled its Indian subsidiary through a Cayman Island company called CGP, whose shares were sold to Vodafone.