Nothing colourable in takeover: Vodafone to SC

NEW DELHI, INDIA: Telecom service provider Vodafone told the Supreme Court on Wednesday that there was nothing colourable in its transaction with Hutchison International Ltd. for acquiring its Indian arm Hutchison Essar in 2007.

The company also contended the apex court bench of Chief Justice S.H. Kapadia, Justice K.S. Panicker Radhakrishnan and Justice Swatanter Kumar that taking the Mauritius route for investment was a device to knock out the tax liability and this was a channel permitted by the central government to attract foreign direct investments.

Vodafone said this in response to a query by the Chief Justice S.H. Kapadia: "Do we take it that concession was not colourable but a device?"

Senior counsel Harish Salve, appearing for the company, told the court that "it was not a bogus transaction but the whole scheme was to knock out taxes".

Also Read: Vodafone warns India tax bill to hit $5bn

He added that there was a distinction between colourable exercise and device directed only to knock out taxes.

The court is hearing a challenge to the Bombay High Court order asking the tax authorities to go ahead with the assessment of the tax liability of the telecom company arising out of its acquisition. The tax liability worked out to Rs. 11,128 crore.

On Wednesday, Vodafone argued that it did not attract the jurisdiction of the Indian tax authorities as Vodafone PLC was based in the Netherlands and Hutchison International Ltd. was based in Hong Kong. It added that the transaction of acquiring Hutchison Essar too took place on a foreign soil.

Asking why the government allowed the Mauritius route, Salve said that it resulted in huge foreign investment without attracting taxes, after which the judges wanted to know about the share capital of the Mauritius company (involved in the transaction).

Salve, however, maintained it was a genuine foreign institutional investment and it couldn't be targeted. "They being exempted from tax is not immoral," he contended, which prompted Chief Justice Kapadia to ask whether it meant the Mauritius industry did not carry out the business. "No, only a few of them,"  replied the senior counsel.

Salve also told the court that any tax on capital gains would hit foreign investments with long term perspective. "We are in a serious threat of lack of resources and China is drying up the market," he explained.

On the direction of the apex court on Nov 15, 2010, Vodafone deposited Rs. 2,500 crore as a component of its tax liability on its takeover.

The court then said that besides depositing Rs. 2,500 crore, the telecom giant would furnish a bank guarantee of Rs. 8,500 crore from a nationalised bank.

If Vodafone succeeded in its case, then the tax authorities would refund the excess amount with interest to be decided by it, said the apex court.