Vodafone wins $2.5 billion tax fight in India

India’s top court yesterday rejected a $2.5 billion tax bill slapped on British phone giant Vodafone over its purchase of a local operator in a ruling closely watched by foreign investors.

Vodafone’s clear-cut victory in the bitter legal dispute was seen as a boost to cross-border mergers and acquisitions in India.

“Indian tax authorities had no jurisdiction to tax Vodafone,” the Supreme Court said, overturning a lower court ruling.

Indian authorities imposed the $2.5 billion tax bill and sought an equal sum in penalties over Vodafone’s $11.1 billion purchase in 2007 of a majority stake in the Indian mobile unit of Hong Kong’s Hutchison Whampoa.

Vodafone chief executive officer Vittorio Colao welcomed a judgement that “underpins our confidence in India” and “faith in the Indian judicial system”.

Following the ruling, Vodafone shares jumped 1.69 per cent to 177.45 pence on the London Stock Exchange, bucking a falling market.

Indian tax officials contended Vodafone should have withheld the amount the vendor was due to pay in capital gains tax when it bought the stake.

However, Vodafone, the world’s largest mobile operator by subscribers, argued it was exempt because the deal took place in the Cayman Islands and both buyer and seller were foreign.

Vodafone also noted it was the purchaser and not the seller and made no gain on the deal.

In the ruling, Supreme Court Justice Radhakrishnan Nair compared the Indian tax demand to “capital punishment on capital investment”.

A lawyer for Vodafone, Abhishek Manu Singhvi, expressed delight over the victory which saw the Supreme Court order the tax department to return Vodafone’s $554 million tax deposit “with interest”.