January 20, 2012 2:03:11 pm
India’s tax office has no jurisdiction over Vodafone’s purchase of mobile assets in India,the Supreme Court ruled on Friday,in a big relief to the telecom giant that has been fighting a $2.2 billion tax bill in a long-running dispute anxiously watched by foreign investors in India.
Vodafone,challenging the tax bill over its $11 billion deal to buy Hutchison Whampoa Ltd’s Indian mobile business in 2007,had appealed to the Supreme Court after losing the case in the Bombay High Court in 2010.
The Supreme Court has asked the tax office to refund 25 billion rupees ($496 million) with 4 percent interest to Vodafone,a lawyer for the British telecom company told reporters.
Vodafone shares in London rose 1.4 percent after the verdict.
The world’s largest mobile operator by revenue had said it believes Indian tax office has no right to tax the transaction between two foreign entities,and even if any tax is to be paid,it should be paid by the seller not the buyer.
Indian authorities had said the deal was liable for tax because most of the assets were based in India and because under local tax law,buyers have to withhold capital gains tax liabilities and pay them to the government.
Vodafone’s India unit is currently the country’s third-largest mobile carrier by subscribers and has the second-largest revenue market share.
Despite its rapid growth,India’s mobile phone market has proved challenging for Vodafone,which has faced a host of problems since entering the fiercely-competitive Indian arena.
In 2010,the British firm took an impairment charge of 2.3 billion pounds ($3.56 billion) on its Indian operations due to severe competition and escalating spectrum costs.
Last year,it agreed to buy out its Indian partner Essar in a $5 billion deal,putting an end to their highly fractious relationship that had spilled over into the open.
Vodafone has said it has plans to list the Indian operation although an IPO is not imminent.
SC’s Vodafone tax verdict good for investment: Analyst
The Supreme Court’s verdict in the overseas transaction tax case against Vodafone is likely to boost the foreign investor sentiment in India and give respite to other litigants in similar type of cases,believe experts.
The apex court today said the I-T Department has “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India and ruled that Vodafone is not liable for taxes and penalties worth USD 4.4 billion.
Though the government will lose out in terms of revenue,the decision is likely to act as a catalyst for future investments and has sent the right signal to the world,especially to investors who want to invest in India. “This settles a prolonged litigation which had created a lot of uncertainty for multinationals having similar structures and/or who had entered into or were proposing to enter into similar transactions,” PwC India Executive Director Sandeep Ladda said.
Nitesh Mehta,Client Service Director,Tax & Regulatory,Walker,Chandiok & Co,also believes “this is a significant ruling which brings a sigh of relief for the taxpayers facing similar issues.”
Some of the major transactions in the recent past over which multinationals are fighting similar tax cases in India include ABMiller’s buyout of Foster,Sanofi Aventis’ acquisition of Shanta Biotech,Kraft Food’s purchase of Cadbury’s and Vedanta’s takeover of Cairn India.
Ladda said,”This should provide much-needed respite to other litigants in other cases where the ‘Vodafone controversy’ had been initiated by the revenue authorities and is currently pending at various stages of litigation across the country.”
However,he added that “any conclusions in this regard in each individual case can only be reached based on the fine print analysis of the judgement”.
The Direct Taxes Code Bill contains a proposal to tax similar transactions and hence,”This ruling may have limited relevance post-implementation of the DTC,” Ladda said.
However,experts are apprehensive that the government could introduce amendments to tax laws,which could negate the impact of this decision.
“While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India,the victory may be short-lived as they have other aces up their sleeves — the General Anti-Avoidance Rules and amendments in the tax law — which can be expected to be brought in the Budget 2012 itself,” Deloitte Haskins & Sells Partner Neeru Ahuja said.
Echoing a similar opinion,Walker,Chandiok & Co’s Mehta said,”We need to look at the upcoming Budget to see if the government introduces any amendments to negate the impact of this decision.”
As per global consultancy firm Grant Thornton,out of the USD 10 billion in deals seen during 2011,seven were inbound.
In the backdrop of existing euro zone uncertainty,the growing domestic market makes Indian targets a safer bet and judgements like this could boost inbound deals significantly,believe experts.
Industry chamber FICCI also welcomed the Supreme Court’s decision on Vodafone and said: “This landmark decision will enhance the trust of international investors in the Indian judicial system and the strong institutional fundamentals underlying the Indian economy.”
It said the decision would re-inject confidence in cross-border mergers and acquisitions and will further augment foreign direct investment in the country.
Indo-American Chamber of Commerce (IACC) National President Anand Desai said it would send a clear message to the international investing community about the supremacy of the rule of law in India.
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