British telecom giant Vodafone has questioned the jurisdiction of the Income Tax Department in slapping the Rs 11,000-crore capital gains tax over its buy out of Hutchison's 67 per cent stake in Essar-Hutchison joint venture, the final hearing on which began in the Supreme Court today.

Appearing before a three-judge Bench headed by the Chief Justice, Mr S. H. Kapadia, senior advocate Mr Harish Salve contended that as the transaction between two foreign companies — Vodafone International Holding BV and Hutchison Communication International Ltd — had happened outside India, the I-T Department could not impose capital gain tax.

“Transfer of control of downstream companies (in this case, Hutchison's Indian telecom assets) by two foreign companies cannot be a basis for (the I-T Department) asserting tax jurisdiction. This is the heart of the matter,” Mr Salve said. Mr Salve submitted that Vodafone was not liable to pay capital gains tax on the 2007 deal because all the parties involved were foreign companies and also the transaction was not carried out in India. Therefore, there was no income that could be subjected to tax in India.

Mr Salve said the complex structure of the deal had not been created to evade any tax, as claimed by the I-T Department. The structure was instead a result of several players entering and exiting the telecom business before Vodafone acquired Hutchison's Indian telecom assets. Therefore, it was not a device to perpetrate a tax fraud and did not amount to a dishonest scheme or money laundering, he claimed.

The Bombay High Court's order on the matter, which is being challenged by Vodafone before the apex court, notes that between 1992 and 2006 Hutchison had acquired interests in 23 mobile telecommunication circles in India. The Bombay High Court had said the I-T Department has the jurisdiction to claim the tax in this case. The Supreme Court sought to know from Mr Salve the nature of the transaction, the reason for routing the deal through a company based in a tax haven (Cayman Islands), and whether the I-T Department could demand tax as the underlying assets were in India.

Mr Salve said though a tax haven was involved, the transaction was genuine and honest as it was transparent.

The case involves the Netherlands-based Vodafone International Holdings BV (VIH), a subsidiary of the UK-based Vodafone Group, acquiring a 67 per cent controlling stake in the Cayman Islands-based CGP Investments Ltd that held the Indian telecom assets (Hutchison Essar) of the Hong Kong-based Hutchison Whampoa. The shares in Hutchison Essar were held through companies based in Mauritius and India. The I-T Department says Vodafone failed to deduct tax at source while acquiring the controlling stake. The high-profile case is keenly watched by many across the globe as the apex court order is expected to have ramifications on India-related acquisitions and foreign investments into the country.

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