In a 2.5 billion dollar sigh of relief for Vodafone, the Supreme Court has ruled that the British telecom giant does not have to pay taxes and penalties for the transaction that saw the company acquire 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007.
In a $2.5 billion relief for Vodafone, the Supreme Court has ruled that the British telco does not have to pay taxes and penalties for the transaction that saw the firm buy 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007.
The deal was worth Rs 55,000 crore or $11.5 billion.
The tax department said the sale was taxable because the assets acquired by Vodafone are based in India.
It said Vodafone had failed to deduct or withhold capital gains tax at the time of purchase.
Capital gains tax is imposed on the profit earned after selling an asset.
The income tax department said that Vodafone should have deducted taxes before making a payment of $11,076 million (about Rs 55,000 crore) to Hutchison Telecommunication International Ltd.
Vodafone claimed that India could not levy taxes because the transaction was made between non-Indian companies outside the country.
Vodafone lost its case in the Bombay High Court in 2008 and then appealed against that verdict in the Supreme Court.
Vodafone was then ordered to deposit Rs 2,500 crore along with a bank guarantee worth Rs 8,500 crore against its alleged dues of nearly Rs 12,550 crore. The Supreme Court ruled in Vodafone's favour in a landmark judgement.
The case was being closely watched by foreign companies interested in investing in India.
The court order will become the central reference point for determining the structure of deals which see Indian assets located in India being traded outside the country - in tax havens like the Cayman Islands among others.
Analysts say at least 8 other companies are facing similar litigation.
GE, SAB Miller, Cadbury, AT&T, Sanofi, and Vedanta are among the companies fighting tax cases in India that could be affected by the Vodafone precedent, said Sandeep Ladda, executive director at PricewaterhouseCoopers in India.
In 2007, Vodafone, a UK-listed company, bought 67 per cent stake in Hutchison Essar, a mobile phone operator in India for about 55,000 crore or $11.5 billion.
The company was renamed Vodafone Essar.
Vodafone chief executive officer Arun Sarin, right, and Hutchison Essar Chief Executive Officer Asim Ghosh at a press conference after announcing the deal in 2007.
