The acquisition of shares in Hutch Essar by Vodafone from Hutchison in a multi-billion dollar M&A overseas deal last year resulted in a dispute on the taxability of capital gains on the transaction. Vodafone-Essar filed a writ petition in the Bombay High Court against the show cause notice issued by the income tax department asking Vodafone-Essar as to why it should not be treated as assessee in default for not deducting tax at source (TDS) while making payment for the 11.1 billion dollar deal and why tax/penalty should not be levied on the company.
The main issue involved is whether the transfer of shares in a foreign company which results in an “extinguishment of rights” and “relinquishment” by the transferor in the shares of the Indian company, is taxable in India.
It is learnt that the High court has not only dismissed the case but also imposed costs on them for not producing vital documents holding the key to resolution of the issue. Vodafone is reportedly planning to move the Supreme Court of India seeking reversal of the High Court verdict. It is expected that a final decision in this case will have far reaching impact and the revenue may have a relook at various similar transactions.
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