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IN a setback to Vodafone, the Bombay High Court has dismissed the telco’s writ petition against the income-tax department’s show cause notice seeking around $1.7 billion as capital gains tax. Vodafone will now move the Supreme Court.

A division Bench comprising Justices S Radhakrishnan and Anand Nirgude also extended the earlier stay on the I-T department’s show cause notice for eight weeks to enable Vodafone to file an appeal in the apex court.

“We have dismissed the petition and the stay granted earlier on their petition will continue for eight weeks,” Justice Radhakrishnan said.

The high court is learnt to have dismissed the plea mainly on the ground that there is no “patent illegality” in I-T department’s show cause notice. Also, “the petitioner, Vodafone International, has suppressed a very important agreement dated February 11, 2007, between Hutchison and Vodafone International”, said a person familiar with the case.

A copy of the 255-page order, detailing the reasons for the petition’s dismissal, was not made available to either of the two parties on procedural grounds. It is expected to be given in a few days.

While the dismissal is not a verdict in the case, it is a setback to Vodafone because it will now have to convince the Supreme Court that it is not liable to pay tax on the $11.2-billion purchase of 67% stake in Hutchison Essar in February 2007, and that it need not submit to the I-T department the confidential documents signed with Cayman Islandsbased Hutchison Telecommunications International (HTIL) at the time of the transaction. It exposes Vodafone to further investigation by tax authorities.

If Vodafone loses the case in the apex court too, it will have to pay $1.7 billion tax, a penalty of equal amount and interest on these at 18% per annum. The total outgo for Vodafone could thus be over $4 billion.

“Vodafone, based on advice received, continues to believe that the transaction is not subject to tax in India and is confident of a positive outcome ultimately,” a Vodafone International spokesperson said.

Daksha Baxi, head of international tax practice at Khaitan & Co, said the development was “rather unfortunate”. Khaitan & Co had advised Hutchison on the transaction with Vodafone.

“I am yet to go through the order of the Bombay High Court and, therefore, I don’t know the reason for the judgement. However, it appears on top of my mind that this would send a wrong signal to the international business community keen on investing in India. MNCs do often execute deals through various layers and structures. But that is for a variety of reasons where the tax implication comes at the bottom of the priority list,” Ms Baxi said.

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