India’s income tax department has been pursuing Vodafone for five years. In September 2010, the Mumbai high court had ruled that Vodafone was liable for the $2.9 billion tax bill, leading to intense speculation about the outcome of Vodafone’s appeal in the supreme court.
Following the judgment, Vodafone was quick to issue a statement, saying: “The court has concluded that Vodafone had no liability to account for withholding tax on its acquisition of interests in Hutchison Essar Limited (now Vodafone India Limited).”
Indian tax officials had tried to claim that the acquisition was taxable because the Hutchison Essar assets were based in India. However, Vodafone’s 2007 deal was between by a Dutch subsidiary of the UK firm and CGP Investments Ltd, a Cayman Islands company which held Hutchison’s Indian telecoms assets.
Vodafone argued that because the transaction was made between non-Indian companies outside India, it was not liable to pay capital gains tax in India.
Vodafone had made a refundable deposit of 25 billion rupees with the supreme court, as well as a bank guarantee to cover the remaining amount of the $2.9 billion tax bill. The Indian authorities will now have to return this deposit to Vodafone.
Vittorio Colao, CEO of Vodafone, issued a statement welcoming the supreme court’s decision. He claimed that the ruling underpins Vodafone’s confidence in India, saying: “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.”
Neil Pamplin, tax director at Grant Thornton, believes that the decision will benefit the Indian economy in the longer term: "This case should help to curb the enthusiasm of the Indian tax authorities to taxing gains made by non-Indian companies when they sell shares in a holding company that owns an Indian subsidiary group. The Indian government loses an immediate opportunity for $9.2 billion. In the long term it will gain by much greater sums, because this ruling enables groups to consider investing in India again with the certainty that they should be able to structure an eventual sale without triggering a liability to Indian tax."
The ruling will also by welcomed by AT&T, which is involved in its own Indian capital gains tax case. In 2005, AT&T sold a 16% stake in Idea Cellular to Aditya Birla Nuvo for $150 million through its holding company, AT&T Mauritius. No tax was paid on the sale, and the Indian tax authorities have since been pursuing AT&T for capital gains tax.
