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Vodafone's Disputed $2 Billion Indian Tax Bill Ruling Scheduled for Today
The Bombay High Court will rule today on Vodafone Group Plc’s dispute with Indian authorities over taxes stemming from the purchase of Hutchison Whampoa Ltd.’s mobile-phone operations in the country. The judgment may set a precedent for tax liability in other cross-border deals.
Judges D.Y. Chandrachud and J.P. Devadhar will deliver their verdict after Indian tax authorities and Vodafone completed their final arguments Aug. 18, according to a notice on the court’s website.
The case in being closely watched by overseas investors for the approach India takes on taxes acquisitions routed through tax havens, according to Akil Hirani, a managing partner at Mumbai-based law firm Majmudar & Co. Britain’s Prime Minister at the time Gordon Brown wrote in December to his Indian counterpart Manmohan Singh that taxing cross-border deals such as Vodafone’s could create uncertainty for foreign investors and affect the country’s investment climate.
“If they lose in the high court, we’re going to see an adverse impact on M & A transactions, especially offshore transactions,” said Hirani. “In fact, the impact is already being felt, because over the last two years as the Vodafone controversy has ballooned, people have been wary, and deal structures are being looked at differently.”
Vodafone’s $10.7 billion acquisition of Hutchison’s Indian mobile phone operations in 2007 was through a Cayman Islands entity. India’s tax department has argued the world’s biggest mobile phone company failed to withhold taxes on its acquisition of Hutchison’s stake in Hutchison Essar Ltd.
Overseas Companies
Vodafone announced its purchase of a 67 percent stake in Hutchison Essar in February 2007. The transaction took place between Netherlands-based Vodafone International Holdings BV and Hutchison, based in Hong Kong. The Hutchison stake Vodafone acquired was owned by a Cayman Islands-based holding company.
The Indian tax authority approached Vodafone in September 2007, with a demand that it owed the government taxes from the purchase. At the time, Vodafone Essar Chief Executive Officer Arun Sarin said the carrier would contest the $2 billion claim.
The dispute, which went up to India’s Supreme Court in January 2009 and ended back in the high court last month, has been closely watched by investors, who have had high hopes for Vodafone’s foray into India, the world’s second-largest market for mobile phone services.
Vodafone argued that since the transaction took place between two overseas companies and the target asset was registered in the Cayman Islands, it doesn’t owe taxes in India.
‘Indian Nexus’
The Indian tax authority has argued that the deal should be taxed because, although the share transfer was of a Cayman Islands entity, the deal had an “Indian nexus,” according to Mohan Parasaran, the department’s senior counsel.
Today’s decision may mark an end to some of the uncertainty over Vodafone’s India operations, fueled by the company booking a $3.3 billion impairment charge in May for its India unit. Vodafone Essar Ltd. is India’s third-largest wireless operator, with more 111 million mobile-phone subscribers and a 17 percent share of India’s 652 million phone accounts at the end of July, according to the nation’s telecommunications regulator.
To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net.
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