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The Bombay High Court has made a critical observation on the ongoing debate over whether income-tax authorities are right in demanding capital gains tax on the recently concluded $10-billion sale of Hutch Essar to telecom major Vodafone.

A Division Bench comprising Justices FI Rebello and JP Deodhar said the deal, as claimed by Vodafone International, is not a simple case of transfer of shares of a foreign company. The court said the sale of shares was with the approval of FIPB, which is subject to compliance with Indian laws and regulations, including tax laws.

The Bench adjourned the hearing on the petition to December 11 and directed that till the court’s further directions, the I-T department will not pass any order against the company.

The observation that the stake sale is not a simple case of a transfer of shares of a foreign company is viewed by tax professionals and tax officers as critical. The telecom majors involved in the deal had always maintained that the Indian I-T authorities have no locus standi in the deal as it was between two foreign entities.

The court made the observation during the hearing of the petition filed by Vodafone International, Netherlands, against whom the income-tax department sent a notice for failure to deduct tax while making payment to Hutchison Telecom International for acquiring 67% stake in Vodafone Essar.

The I-T department, by sending notices, is exploring the possibility of levying a capital gains tax of $1.5-2 billion.

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