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VODAFONE, which is facing a $2-billion tax demand following its acquisition of the telecom major Hutch-Essar, will challenge the Income-Tax Act once it stipulates that the buyer of shares will have to pay tax if the seller has not paid it. The amendment to the tax law proposed in the Budget with retrospective effect will have a significant impact on several crossborder M&A deals. The Bombay High Court decided to adjourn the hearing on the merits of the writ petition filed by Vodafone International Holdings. A Bombay High Court bench decided that the matter should be deferred until the law change is enacted so that they would consider the merits of the Vodafone writ in light of the amended law.

Once enacted, the amendment proposed in the Budget will widen the scope of Section 201 of the income-tax law and could effectively weaken Vodafone’s stand. Vodafone has argued that even if the Hutch-Essar deal was taxable, Vodafone, the buyer, is not obliged to pay tax on it.

Vodafone’s plan to challenge the law was mentioned before the Bombay High Court during the hearing of the Vodafone writ petition, challenging the tax notice slapped on it. Since Hutch, a Hong Kong-based company has not paid any tax on the deal, the proposed change in the law would bind Vodafone, which bought the shares from Hutch, to pay tax on the deal.

The I-T department has raised similar queries on more than 400 cross-border M&As, including deals like Idea Cellular, SABMiller-Foster’s and Genpact.

Vodafone would challenge the “retrospective aspect” of the amendment. It has been proposed that the amendment would be effective from 2002. The Hutch-Essar deal was struck in 2006. Vodafone has argued that the shares of Hutch-Essar sold by the Hong Kong-based Hutchison International to the Netherlands-based Vodafone, was a transaction that took place outside India and Indian tax authorities have no locus standi on the deal. In other words, Vodafone has no tax liability in India on the deal.

The tax department took a diametrically opposite stand. It said the profit made by Hutchison out of selling Hutch- Essar to Vodafone was profit generated in India. Therefore, Vodafone, the buyer of the shares had an obligation to pay the withholding tax in India, before making the payment to Hutchison.

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