Supreme Court rejects bid to review Vodafone tax case

NEW DELHI Wed Mar 21, 2012 12:10am IST

1 of 2. The Vodafone logo is seen at the counter of the shop as customers look at mobile phones in Prague February 7, 2012.

Credit: Reuters/David W Cerny/Files

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NEW DELHI (Reuters) - The Supreme Court dismissed on Tuesday a government bid to review a $2.2 billion tax case won this year by British company Vodafone Group Plc (VOD.L), saying the petition had no merit.

After a five-year legal battle, Vodafone in January won a Supreme Court verdict that it was not liable to pay any tax on its $11 billion acquisition of Hutchison Whampoa Ltd's (0013.HK) Indian mobile business, from which the government demanded a tax of $2.2 billion.

The Supreme Court ordered the government in January to pay back to Vodafone with a 4-percent interest the money the company had deposited pending a final verdict. Last month the government filed a plea seeking a review of the verdict.

"We find no merit in the review petition. The review petition is, accordingly, dismissed," a three-judge panel, led by Chief Justice S.H. Kapadia, said in a joint order on Tuesday. The same judges had ruled in favour of Vodafone in January.

However, Vodafone, the world's biggest mobile phone carrier by revenue, still faces risks over the tax demand as India proposed in its budget last week retroactive changes in tax rules, prompting speculation the case could be reopened, although the government has denied it is looking to raise any fresh tax demand on Vodafone.

"This matter is closed as far as the current laws are concerned," said Sudhir Kapadia, national tax leader at Ernst & Young. "But now if the government makes retrospective changes in tax rules through legislative intervention then it would reopen the entire issue."

Vodafone said in a statement Tuesday's verdict "once again emphasises the legality and bona fides of the transaction", adding it was looking forward to get back the 25 billion rupees it had deposited, pending a verdict.

Vodafone shares closed up 2.1 percent in London trading.

TOUGH INDIAN MARKET

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 its Indian unit became the country's second-largest mobile carrier by revenue and third-largest by subscribers, Vodafone took an impairment charge of $3.6 billion in 2010 due to cut-throat competition and escalating spectrum costs.

Last year, it reached an agreement to buy out partner Essar group from their Indian joint venture, putting an end to their highly fractious relationship that had spilled over to the open.

Vodafone had argued in the tax case that Indian authorities had no right to tax the transaction between two foreign entities. Even if tax was due, the company had argued, it should be paid by the seller and not the buyer.

The Indian authorities had said the deal was liable for tax as most of the assets were in India and as per the local tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.

The country's federal budget included a proposal that, if passed by parliament, will allow India to retrospectively tax cross-border transactions in which the underlying assets are located in India. Tax professionals have said the potential law is likely to come in for challenge.

"This relief is temporary as the government has proposed retrospective amendment to the income tax law to tax this transaction," said Hemant Joshi, Partner at Deloitte Haskins & Sells, referring to the Vodafone deal.

"However, the jury is not out yet. It is not an open and shut case. (The) matter will be litigated."

(Additional reporting by Kate Holton in London; editing by James Jukwey)

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