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THE Bombay High Court has issued notice to the income-tax department following a writ petition by Vodafone Essar Ltd challenging the tax department’s move to levy capital gains tax following the Vodafone-Hutch deal. This gives tax authorities an opportunity to present its case before the court when it hears the petition on September 27.

The I-T department will attempt to prevent grant of injunction by the court as a stay would make it difficult for it proceed further on the is-sue. The department is yet to carry out an assessment of the transac-tion and books of accounts which takes place only after reply in response to show cause is examined.

Vodafone Essar had approached the Bombay High Court challenging the right of income tax department to levy capital gains tax on it. The company had filed the writ after, the I-T department issued it a show cause notice asking it to explain as to why it (Vodafone Essar which was formerly Hutchison Essar) should not be treated as an agent of Hutchison International.Hutchison International had sold a majority stake in Hutchison Essar to Vodafone for $11.2 billion.

The court’s decision on September 27 assumes importance as it would set the course for further action by the department which is betting big on the case. This is probably the first time tax authorities are at-tempting to tax a transaction between two foreign companies involv-ing transfer of an Indian asset. If the tax liability is established, it could amount to about $ 1.7 billion.

Hutchison, the seller, would ordinarily have this liability. However, since the tax authorities do not have access to Hutchison in Hong Kong, they have issued a notice to Vodafone Essar.

Tax authorities want to treat Vodafone Essar as an ‘agent’ of the non-resident (Hutchison International) under Section 163 of the Income-Tax Act, 1961, which is being contested by the company. The com-pany, in its reply, has pointed out that since the transaction between Hutchison International and Vodafone was structured through Mauri-tius, it would not attract tax in India. India has a double taxation avoidance treaty with Mauritius.

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

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