Supreme Court rejects appeal against transfer of Vodafone Essar Gujarat’s assets

In a major relief to Vodafone, the Supreme Court on Wednesday rejected the income tax department’s appeal challenging Vodafone Essar Gujarat’s transfer of certain passive assets to Vodafone Essar Infrastructure.

However, it said that the department is free to raise tax demand under relevant tax laws but can’t block the demerger, which was approved by the Gujarat High Court in August 2012.

The department had challenged the demerger on the ground that the scheme was intended to avoid capital gains tax worth Rs 3,500 crore and stamp duty worth Rs 600 crore, a charge strongly denied by Vodafone. While Vodafone Essar Infrastructure was subsequently wound up and amalgamated into a new company called Indus Towers Ltd, the I-T department called the entire transaction a “colourable device” to avoid paying taxes. Under the scheme, Vodafone Essar Gujarat and its six associate companies were permitted to transfer passive infrastructure assets worth Rs 15,000 crore to group firm Vodafone Infrastructure.

Stating that tax avoidance cannot be considered as tax evasion, a bench headed by Justice FMI Kalifulla dismissed the department’s appeal, saying that the HC had specifically protected the interests of the tax department to initiate any appropriate proceedings regarding recovery of the tax from the companies. Even the HC had also held that such right of the revenue shall not be affected in view of the sanction of the scheme.

Tower sharing is encouraged by the government to keep costs low for making cellular telephony available in rural areas. Vodafone, Bharti and Idea own Indus in the ratio of 42:42:16.

The department had challenged the HC’s order granting approval to Vodafone Essar Gujarat Ltd’s demerger of towers to Vodafone Essar Infrastructure on the ground that it was the first step in an alleged tax avoidance arrangement prior to this entity’s amalgamation into Indus Towers, which also holds the towers of Bharti Airtel and Idea Cellular for common use.

Arguing that it was an attempt to consolidate assets to utilise them, Vodafone Essar Gujarat Ltd argued that the scheme scantioned by the HC for demerger of passive infrastructure assets and subsequent amalgamation into Indus Tower Ltd was over and the same had been filed with the Registrar of companies.