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SC Rules In Vodafone's Favour, Sets Aside HC Verdict

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In a major victory to Vodafone International Holdings, the Supreme Court on Friday set aside the Bombay High Court judgement asking the company to pay income tax of Rs 11,000 crore, holding that tax authorities do not have jurisdiction on an overseas transaction. This was a long-running dispute watched anxiously by foreign investors in India.

UK-based Vodafone Group Plc,the parent company of Vodafone Essar, hailed the apex Court's ruling, saying the judgement underpins its confidence in the country.

"We welcome the Supreme Court's decision, which underpins our confidence in India. We will continue to grow our Indian business - including making significant investments in rural areas and in 3G network coverage - for the benefit of Indian consumers," Vodafone CEO Vittorio Colao said in a statement.

A three-judge bench headed by Chief Justice S H Kapadia held that the IT department has "no jurisdiction" to levy tax on overseas transaction between companies incorporated outside India.

Justice K S Radhakrishnan, who wrote a separate judgement, concurred with the findings of the Chief Justice and Justice Swatanter Kumar saying the companies (Vodafone and Hutchison) are incorporated outside and their transaction outside India has "no underlying nexus" with tax authority here.

"Vodafone has no obligation under section 163 clause 1 (c) of Income Tax Act," Justice Radhakrishnan said.

The court asked the IT department to return Rs 2,500 crore deposited by Vodafone, in compliance of its interim order, within two months along with 4 per cent interest from the date of withdrawal of the money by the tax department.

It also asked Supreme Court registry to return within four weeks, the bank guarantee of Rs 8,500 crore given by the telecom major.

Reacting to the judgement, Abhishek Manu Singhvi, one of the senior advocates who appeared in the case, said "we are happy with the Supreme Court order. It has minutely gone through the case and come to a conclusion. Irrespective of the result it is a tremendous victory for Indian judicial System."

Through the $11.2-billion deal in May 2007, Vodafone acquired 67 per cent stake in the Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in Netherlands and Cayman Island.

Vodafone, challenging the tax bill over its $11 billion deal to buy Hutchison Whampoa Ltd's  Indian mobile business in 2007, had appealed to the Supreme Court after losing the case in the Bombay High Court in 2010.

The Supreme Court has asked the tax office to refund Rs 2,500 crore with 4 per cent interest to Vodafone, a lawyer for the British telecom company told reporters.

India's reputation as an investment destination has taken a hit over the past year as the economy slowed, government reforms stalled and corruption scandals - notably in the telecoms industry - heightened concerns about government policies.

"All this talk about uncertainty for foreign investment, well, I hope for one area, this judgment clears the air," Harish Salve, one of India's top lawyers who argued for Vodafone in the case, said after the verdict was announced on Friday.

The verdict, which sent Vodafone shares up as much as 2.5 percent in London, was a rare piece of positive news for foreign investors in India over the past few months.

Just last month, plans to open up the country's $450 billion retail sector to global supermarket operators were derailed by political opposition.

Investment proposals in India plunged 45 per cent to a five-year low in 2011 as companies halted projects, many citing red tape and administrative gridlock, according to the Centre for Monitoring Indian Economy.

"I think it's a good decision," said Pranav Sayta, a tax partner, Ernst & Young. "It will help investments into India. It's definitely good for the industry. The confidence level on the Indian judicial process should certainly go up now."
Vodafone shares in London rose 1.4 per cent after the verdict.

The world's largest mobile operator by revenue had said it believes Indian tax department has no right to tax the transaction between two foreign entities, and even if any tax is to be paid, it should be paid by the seller not the buyer.

Indian authorities had said the deal was liable for tax because most of the assets were based in India and because under local tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.

Vodafone's India unit is currently the country's third-largest mobile carrier by subscribers and has the second-largest revenue market share.

Despite its rapid growth, India's mobile phone market has proved challenging for Vodafone, which has faced a host of problems since entering the fiercely-competitive Indian arena.

In 2010, the British firm took an impairment charge of 2.3 billion pounds on its Indian operations due to severe competition and escalating spectrum costs.

Last year, it agreed to buy out its Indian partner Essar in a $5 billion deal, putting an end to their highly fractious relationship that had spilled over into the open.

Vodafone is the largest overseas corporate investor in India but has come to symbolise the perils foreign firms face doing business in the country.

The company has made India the centrepiece of its fast-growing emerging markets portfolio, designed to balance out slowing growth in more mature European territories.

Robin Bienenstock, an analyst at Bernstein Research in London, said she expected Vodafone to announce an IPO for 30 per cent of the Indian business later this year that could raise 3.4 billion pounds.
Friday's ruling will also be welcomed by other multi-national companies that could potentially face tax issues in India over cross-border deals.

Last year, India's finance ministry said it was looking into whether Kraft Foods would have to pay taxes to Indian authorities in its $19 billion takeover of Cadbury in 2010.

Global brewer SABMiller and AT&T Inc are also involved in tax disputes in India, media reports have said.

(BW Online Bureau With Agencies)