In a major blow to British telecom major Vodafone, the Bombay High Court today, dismissed its petition questioning the IT department’s jurisdiction in the ongoing tax battle. A Division Bench consisting of Justices D.Y. Chandrachud and J.P. Devadhar while dismissing their petition said, “The IT authority's order can’t be held to lack jurisdiction.”

The British telecom which, in 2007 had purchased a 52 percent stake in Hutchison Essar from Hutchison, found itself at the deep end of a tax enquiry by the Central Board of Direct Taxes (CBDT).

The IT department had issued a notice relating to the purchase of 52 percent stake in Hutchison Telecom to Vodafone for a whopping $11.6 billion (Rs. 52,200 crore). The tax department had alleged that since Hutchison made capital gains in the sale transaction, Vodafone should have deducted tax on it.

Harish Salve who had appeared for Vodafone had argued that the stake changed hands through a subsidiary in the Cayman Islands and the shares were held in Hutchison Essar, now called Vodafone Essar, through several companies in Mauritius and India. In page 3 of the judgement, Justice Chandrachud unveils this complex shareholding pattern in Hutch telecom. Salve also argued that, “Apart from the transaction being offshore, India has a double-taxation tax treaty with Mauritius”. 

The parties have already been through a first round of litigation where Vodafone had taken the issue of jurisdiction all the way to the apex court where it had questioned the jurisdiction of the CBDT. The Supreme Court dismissed Vodafone's petition had asked them to go back to the tax office on the issue.

After the first round, the CBDT had on May 31, 2010, claiming jurisdiction on Hutch-Vodafone transaction levied a Rs.12,000 crore ($2.6 billion) liability on Vodafone inclusive of penalties.The court had obtained an undertaking from the tax department to not proceed until further orders are passed in the writ petition.

In the first round ALMT partners Aliff Fazelbhoy and Hitesh Jain along with Senior Counsels Iqbal Chagla and Dinesh Vyas had argued for Vodafone. Noted jurist and Senior Advocate Fali Nariman had argued on behalf of the British telecom major in the Supreme Court. 

Vodafone, in the second round of litigation before the Bombay High Court had engaged Senior Counsels Harish Salve and Abhishek Manu Singhvi. Anuradha Dutt and Fereshte Sethna of Dutt Menon Dunmorrsett had briefed the Senior Counsels on behalf of Vodafone.

The CBDT has consistently been represented by Additional Solicitor General (ASG), Mohan Parasaran. Along with the ASG, G.C.Srivastava, Special Counsel, B.M.Chatterji, Senior Standing Counsel to the Government assisted the ASG.

A spokesperson for Vodafone has confirmed to reporters that the company will be approaching the Supreme Court to appeal against the decision. Vodafone has four weeks to approach the apex court and the Bombay HC has ordered the tax department to not pass any orders for the next 8 weeks.

The verdict is expected to have far reaching affects in future transactions between Indian and foreign companies.

A copy of the judgment is available here.