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Vodafones petition premature, says IT department
October, 17th 2007

The Income Tax (I-T) department has termed as premature the petition filed by Vodafone-Essar in the Bombay High Court challenging its notice, which proposed that capital gains tax be levied on the $11.2 billion Hutchison-Vodafone deal.

The I-T department had issued the show-cause notice to Vodafone-Essar asking the company why it should not be treated as an agent of Hutchison International, which sold a 67 per cent, majority stake in Hutchison Essar to Vodafone.

Considering the fact that the department has not yet levied any capital gains tax on the company, the petition is premature, the department said.

In September, Vodafone-Essar had approached the high court challenging the tax departments move.

The department is yet to carry out an assessment of the transaction and the books of accounts, which will be done only after Vodafone-Essar replies to the notice.

Vodafone, Netherlands, was acquired by CPG Limited, a 100 per cent subsidiary of HutchisonMax. CPG owns 8 companies in Mauritius and has bought a 52 per cent stake in Hutch, India.

This is probably the first time that tax authorities are attempting to tax a transaction between two foreign companies involving the transfer of an Indian asset. If the tax liability is established, it could amount to around $ 1.7 billion.

Under normal circumstances, the seller (Hutchison) has the liability. However, since the department does not have access to Hutchison in Hong Kong, they sent the notice to the buyer (Vodafone-Essar).

Taxmen are claiming capital gains under Section 9(1)(i) of the Income-Tax Act since the transaction involved the transfer of an Indian asset for which approval of the Foreign Investment Promotion Board was sought.

Challenging the departments contention, Vodafone-Essar stated that since the transaction was structured through Mauritius, it should not attract tax in India. India has a double taxation avoidance treaty with Mauritius.

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