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India’s Supreme Court has ruled in favour of Vodafone in the company’s legal proceedings against the local tax authorities, who asserted that the telecom giant had a liability of £1.4 billion.
The case came as a result of the business's £7.2 billion acquisition of Hutchison Telecom’s 67% stake in an Indian joint venture company in 2007.
The Supreme Court overturned the High Court decision in 2010 and ordered that Vodafone be repaid around £321 million, which it had deposited with the tax authorities, with interest.
Kevin Phillips of Baker Tilly claimed other multinationals that had undertaken similar transactions would be relieved by the outcome of the case on the sub-continent, saying it ‘effectively restores the previously widely understood order, and gives much needed confidence to existing and future foreign investors, and not just in India’.
The case centred on the fact that Indian, under domestic law, is entitled to levy capital gains tax on foreign investors when assets situated in its territory change hands, including includes sales of shareholdings in Indian companies.
But although the 67% stake purchased from Hutchison Telecom was ultimately in an Indian company, Hutchison Essar Ltd, the shareholding did not in fact change hands.
Rather, Vodafone bought from Hutchison Telecom’s Hong Kong parent company a Cayman Islands subsidiary that owned the stake in the Indian company’. The transaction was carried out between two non-Indian companies, outside India, and the sale was of shares in a Cayman company.
Therefore, Vodafone and several international tax advisers considered that India had no jurisdiction to tax the gain that arose for Hutchison Telecom.
Grant Thornton’s Neil Pamplin hoped the decision will ‘help to curb the enthusiasm of the Indian tax authorities to tax gains made by non-Indian companies when they sell shares in a holding company that owns an Indian subsidiary group’.
He said the case ‘clarifies the situation and enables groups to consider investing into India again with the certainty that they should be able to structure an eventual sale without triggering a liability to Indian tax’.
