(Reuters) - 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 (1.4 billion pounds) 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 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.