The dispute has dominated headlines ever since Vodafone made the $11.2 billion purchase of a 67% stake in Indian cellular phone operator Hutchison Essar from Hong Kong's Hutchison Telecommunications in 2007.
Vodafone opened the hearing yesterday by questioning the tax authorities’ decision to slap a $2.5 billion tax bill on capital gains from the transaction.
Senior advocate, Harish Salve, representing Vodafone said that the tax department has no authority to tax the transaction as the deal took place between two foreign companies.
He added that the deal was a transfer of control of “two downstream companies by the two foreign companies and it cannot be a basis [for the tax department] to exercise jurisdiction".
Vodafone’s other legal counsel is Abhishek Singhvi, who is also a ruling Congress party spokesman.
The three-judge bench, headed by Justice SH Kapadia, then asked questions about the nature of the transaction and commented on observations made by the Bombay High Court in a previous round of the dispute.
As the case continues, Vodafone are likely to argue that since the transfer is of a capital asset situated outside India, the gains arising there from should not be liable to tax in India in the hands of the non-resident seller entity and that the Indian withholding tax provisions under section 195 of the Income Tax Act do not apply to offshore entities making offshore payments.
The authorities will disagree and say that since the transaction under consideration had a substantial nexus in India, it would result in an obligation being cast on Vodafone to deduct tax at source under section 195.
Previously, the Bombay High Court ruled that once territorial nexus is established, the provisions of section 195 would operate.
The case continues.
Follow www.internationaltaxreview.com for full coverage of the hearing.
