Supreme Court admits tax appeal against Vodafone

To decide whether capital gains on surrender of call options are taxable

The Supreme Court on Friday admitted an appeal by the Income Tax Department against a Bombay high court order rejecting its demand to raise tax on Vodafone for a Rs 8,500-crore deal with Hutchison.

The bench, presided over by Justice Anil Dave, issued a notice to the company.

The Bombay high court had in April set aside an order of the Income Tax Appellate Tribunal, which had ruled the tax department had the power to raise a tax demand on Vodafone over the sale of its call centre business to Hutchison Whampoa Properties in 2007-08 and assignment of a call option to Vodafone.

The high court had held that surrender of option rights was not a transfer under the Income Tax Act. The question involved was the taxability of capital gains arising from the surrender of call option rights, revenue authorities said. The ruling could affect several other cases involving Shell, IBM and Nokia.

This case is different from another one in which the Central Board of Direct Taxes had decided not to appeal against a high court ruling, rejecting a claim that Vodafone priced the shares of its stakes in its Indian companies sold to other arms of Vodafone in a manner that would avoid taxes.

The apex court is not likely to take up the case this month because it is closing for the summer vacation and will re-open at the end of June.

Amit Maheshwari, managing partner of Ashok Maheshwary and Associates, said the move by the tax department would dampen investor sentiment. “Foreign investors are not seeing big names like Vodafone and Cairn getting a reprieve from litigation,” he said.

Finance Minister Arun Jaitley had said in New York recently the case had nothing to do with retrospective tax and no company was immune from paying taxes. He had said important questions of law went to the Supreme Court.

Vodafone is embroiled in arbitration with the government over a retrospective amendment to the Income Tax Act. The latest budget had offered the company the option to come out of arbitration and pay tax without interest and penalty.

Vodafone did not respond to queries by Business Standard.

Photograph: Danish Siddiqui/Reuters