Vodafone Isn’t Liable for Hutchison Tax, Indian Court Rules

By Pratap Patnaik and Ketaki Gokhale - Jan 20, 2012 3:46 PM GMT+0700

Vodafone Group Plc (VOD), the world’s biggest mobile-phone company, isn’t liable to pay more than $2 billion in Indian tax related to a 2007 acquisition, the South Asian nation’s top court said, reversing a previous ruling.

Indian tax authorities can’t seek capital gains tax from Vodafone’s purchase of Hutchison Whampoa Ltd. (13)’s wireless operations because the transaction occurred between foreign companies, according to the ruling by a Supreme Court panel headed by Chief Justice S.H. Kapadia. The court directed the government to return Vodafone’s deposit with 4 percent interest.

“Such imposition of tax amounts to capital punishment on capital investments,” Justice K.S. Radhakrishnan said in his ruling in New Delhi today.

The Supreme Court decision brings an end to more than four years of uncertainty about Vodafone’s tax obligations in India, and about whether investors based outside the country can use offshore holding companies to avoid Indian taxes. Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International, acquiring CGP Ltd., a Cayman Islands holding company controlled by Hong Kong-based Hutchison.

“This is very positive, especially for the foreign investor’s perspective about India,” said Walter Rossini, a Milan-based fund manager who oversees 200 million euros ($258 million) in Indian equities at Aletti Gestielle SGR SpA.

Vodafone shares rose as much as 2.5 percent on the London exchange.

The Indian tax department sought 112.2 billion rupees ($2.2 billion) in capital gains tax on Vodafone International Holdings BV’s purchase of Hutchison’s wireless operations in the country. While Hutchison profited from the sale, the Indian tax department pursued Vodafone, saying the company should have withheld the tax from its payment to Hutchison.

Contest Claim

Vodafone had expected the tax bill could rise to $5 billion including penalties, Chief Financial Officer Andy Halford told reporters in New Delhi in June. Such amounts “are quite big uncertainties if you are looking to invest in other countries,” Halford said. Companies should wait to see how the dispute is resolved before making new investments in India, he said.

’’The judgment will boost capital investments into India as some tax uncertainty will go away,’’ Harish Salve, counsel for Vodafone, said today. “The judgment implies that it is not for tax authorities to decide what is capital gains.”

The Indian tax authority approached Vodafone in September 2007, saying the company owed the government taxes from the purchase. At the time, Vodafone’s then Chief Executive Officer Arun Sarin said the carrier would contest the claim.

To contact the reporters on this story: Pratap Patnaik in New Delhi at ppatnaik2@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Arijit Ghosh at aghosh@bloomberg.net