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The Supreme Court ruled in favor of Vodafone Group Plc in its fight against a $2.2 billion tax bill, a decision analysts said would encourage foreign investment and clear the way for the company's planned initial public offering in India.
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India's reputation as an investment destination has taken a hit over the past year as the economy slowed, government reforms stalled and corruption scandals - notably in the telecoms industry - heightened concerns about government policies.
"All this talk about uncertainty for foreign investment, well, I hope for one area, this judgment clears the air," Vodafone lawyer Harish Salve said after the verdict was announced on Friday.
The verdict, which sent Vodafone shares up 1.8 percent in London, was a rare piece of positive news for foreign investors in India over the past few months.
Just last month, plans to open up the country's $450 billion retail sector to global supermarket operators were derailed by political opposition.
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Investment proposals in India plunged 45 percent to a five-year low in 2011 as companies halted projects, many citing red tape and administrative gridlock, according to the Centre for Monitoring Indian Economy.
"I think it's a good decision," said Pranav Sayta, a tax partner, Ernst & Young. "It will help investments into India. It's definitely good for the industry. The confidence level on the Indian judicial process should certainly go up now."
The tax bill related Vodafone's $11 billion deal to buy Hutchison Whampoa Ltd's (0013.HK) Indian mobile business in 2007. The UK-based company had appealed to the Supreme Court after losing the case in the Bombay High Court in 2010.
NO RIGHT
Vodafone, the world's largest mobile operator by revenue, had argued that Indian tax authorities had no right to tax the transaction between two foreign entities.
Even if tax was due, the company said, 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 in India and because under local tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.
The court ruled that Indian tax authorities had no jurisdiction over Vodafone's purchase and ordered the tax department to refund to Vodafone the 25 billion rupees it had been asked to deposit pending a ruling.
It also ordered the tax office to pay Vodafone 4 percent interest on the funds.
