In a relief to Vodafone Plc, the Supreme Court on Friday ruled that the British telecom giant wasn’t liable to pay Rs 11,218 crore in taxes for a deal it inked in 2007 to acquire majority stake in mobile phone operator Hutchison Essar.
The judgment is likely to have significant implications for foreign investment as it makes clear that companies cannot be taxed in India for acquiring assets if the deal is concluded overseas.
The government, which stands to lose potential tax revenues from prospective mergers and acquisitions involving Indian companies, went into a huddle. Finance minister Pranab Mukherjee discussed with law minister Salman Khurshid the revenue and legal implications of the verdict.
“The offshore transaction… is a bona fide structured FDI investment into India which fell outside India's territorial tax jurisdiction, hence not taxable,” a three-judge bench headed by Chief Justice SH Kapadia ruled.
The income tax (I-T) department slapped the telecom giant with a Rs 11,218-crore bill after it acquired 67% stake in Hutchison Essar, the Indian mobile business of Hong Kong-based Hutchison Whampoa, for $11.1 billion (about Rs 55,000 crore) in 2007.
The tax officials argued that though Vodafone made the payment to Hutchison's subsidiary in Cayman Islands, it was essentially a transfer of an Indian asset and, therefore, Vodafone should have deducted tax at source when it made the payments.
The case was significant on account of the tax amount involved and the precedent it could set for such deals. The SC rejected the I-T department's contention and held that the deal was “not a sham or tax avoidant preordained transaction,” setting aside a Bombay high court judgment that said revenue authorities were empowered to tax such transactions.
The SC also asked the I-T department to refund Rs 2,500 crore deposited by Vodafone within two months along with 4% interest. It directed the court's registry to return within four weeks, the bank guarantee of Rs 8,500 crore given by the telecom major.
“We welcome the Supreme Court's decision, which underpins our confidence in India,” Vodafone CEO Vittorio Colao said in a statement. “We will have to study it,” the finance minister said. CBDT set up a 10-member committee to study the judgment.