NEW DELHI (Dow Jones)--India's Supreme Court Friday backed
mobile giant Vodafone Group PLC (VOD.LN)'s appeal against a
INR112.18 billion ($2.2 billion) tax bill on its 2007 purchase of a
majority stake in India's Hutchison Essar Ltd., saying that local
authorities can't tax the deal, in a landmark ruling which is
expected to boost foreign investor confidence.
The decision could result in Vodafone being able to avoid
handing over around $2.2 billion in taxes, which it says it
shouldn't have to pay because the deal was conducted overseas.
The offshore transaction is a "bonafide" structure and isn't
taxable, Chief Justice S.H. Kapadia, head of a three-judge bench,
said while passing the verdict.
The bench directed the tax department to refund the INR25
billion ($496.5 million) which Vodafone--the world's biggest mobile
network operator by sales--had deposited in the case, with 4%
interest.
India's tax authorities can file an appeal against the ruling,
but they haven't decided yet, said Mohan Parasaran, counsel for the
local tax department.
In a statement responding to the Supreme Court judgment,
Vodafone said: "We are a committed long-term investor in India and
will continue to grow our Indian business..."
Vodafone lawyer Harish Salve said the Supreme Court has reacted
positively to a foreign investor which came in and set up one of
India's most successful telecommunication networks.
The case is being closely watched by foreign companies with
investments in India for clarity on the country's tax regime.
The uncertainty created by the case is already viewed as one
reason why foreign direct investment has declined in India.
The country received $30.38 billion of FDI in the fiscal year
through March 2011, about 20% lower than in the previous fiscal
year. India has received about $27.88 billion of foreign direct
investments in 2011's April-October period.
The case concerns Vodafone's $11.2 billion purchase of a 67%
stake in Hutchison Essar, India's second-largest mobile operator by
revenue, from Hong Kong's Hutchison Whampoa Ltd. (0013.HK).
This was Vodafone's first move into the Indian market, where it
now has nearly half of its worldwide total number of customers.
When asked to pay tax in India, the U.K.-based company argued
that--since the purchase was made by a Vodafone holding company in
the Netherlands, and Hutchison Essar was registered in the Cayman
Islands--no capital gains tax is due in India since neither company
involved in the purchase is Indian.
Even if tax were due in India, it is the seller, Hutchison, and
not the buyer which should pay it, Vodafone said.
Friday, Judge Kapadia ruled that it can't be said that
Hutchison's Cayman Islands unit was created only for the purpose of
the deal, given the duration of the holding structure, the business
operation and the timing of the exit.
Following the ruling, Vodafone shares were up 3 pence, or 1.8%,
at 178 pence on the London bourse. It is the top riser on the FTSE
100 index, which is down 0.2% at 0843 GMT.
Vodafone had challenged a lower court ruling which allowed
Indian local authorities to charge INR112.18 billion ($2.2 billion)
in capital gains tax and interest on the transaction. The company
also appealed against a penalty for non-payment of the tax that it
said could amount to 100% of the taxable amount, taking the total
sum to nearly $4.5 billion.
"So this is a great sign that Vodafone is managing local
relationships better and that, at least on this occasion, the
Indian authorities have behaved rationally," said Sanford C
Bernstein analyst Robin Bienenstock.
Following orders from the Supreme Court, Vodafone deposited
INR25 billion with the court, and provided a bank guarantee worth
INR85 billion ($1.69 billion) with a state-run bank.
Vodafone has had a rough time in India. Apart from the court
case, the company was forced to book a GBP2.3 billion impairment
charge on its Indian operations--now renamed Vodafone Essar--in May
2010 due to tough competition from more than a dozen mobile players
as well as a fierce price war.
It has also had to pay $2.6 billion for third-generation
licenses and faces further spending for additional spectrum and
license renewals.
It is also embroiled in a widening investigation by Indian
police into alleged irregularities in the awarding of 2G mobile
spectrum between 2001 and 2003.
Indian police raided the offices of Vodafone Essar and Bharti
Airtel--the country's biggest telecom company by subscribers--in
mid-November, accusing two former telecom officials of colluding
with the two companies and causing the government a loss of INR5.08
billion ($99 million) through faulty allocation of additional
bandwidth between 2001 and 2007.
Both companies said they were in compliance with existing
rules.
Still, fast-growing India contributed GBP2.18 billion, or around
9%, of Vodafone's total revenue of GBP23.52 billion for the six
months to Sept. 30. Of the group's 391 million mobile customers,
more than 145 million are in India.
In November, Vodafone posted an 11% drop in first-half net
profit due to costs for the company's Greek operations, but it
raised its full-year outlook because of a better-than-expected
performance in Europe and strength in emerging markets.
The group's Indian business posted a 13% rise in first-half
revenue from a year earlier, underpinned by consumer demand and new
short message service termination charges in the country.
--By R. Jai Krishna, Lilly Vitorovich, Romit Guha and Prasanta
Sahu, Dow Jones Newswires; +91-22-61456116;
romit.guha@dowjones.com
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