Vodafone India
Insight: Vodafone India Reuters

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.

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.

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.


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.

Vodafone is the largest overseas corporate investor in India but has come to symbolise the perils foreign firms face doing business in the country.

While it became India's third-largest mobile carrier by subscribers, the company took an impairment charge of $3.56 billion on its Indian operations in 2010 due to cut-throat competition and skyrocketing spectrum costs.

We are a committed long-term investor in India, Vodafone Chief Executive Vittorio Colao said in a statement.

We will continue to grow our Indian business -- including making significant investments in rural areas and in 3G network coverage, he said.

Vodafone agreed to buy out Indian partner Essar Group for $5 billion last year, putting an end to their highly fractious relationship that had spilled over into the open.

Vodafone has said it has plans to launch an initial public offering of shares in its Indian business but has not set a timeframe.

Robin Bienenstock, an analyst at Bernstein Research in London, said he expected Vodafone to announce an IPO for 30 percent of the Indian business later this year that could raise 3.4 billion pounds.

The resolution ... will reassure investors, the majority of whom we think had resigned themselves to Vodafone being required to pay, and also to those who suspected that the final liability may have been greater than the original demand, Bienenstock said in a note.

With more than 880 million mobile subscribers India is the world's second-biggest telecoms market after China.

The sector is highly regulated, however.

The government is overhauling its decade-old telecoms rules after a massive licensing scandal came to light last year, but there is little clarity on key issues, including new rules for mergers and acquisitions in the crowded 15-player market.

Friday's ruling will also be welcomed by other multi-national companies that could potentially face tax issues in India over cross-border deals.

Last year, India's finance ministry said it was looking into whether Kraft Foods (KFT.N) would have to pay taxes to Indian authorities in its $19 billion takeover of Cadbury in 2010.