Vodafone Wins Landmark US$2.5 Billion India Tax Case

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New ruling will encourage India FDI and increase M&A activity

Jan. 31 – India’s Supreme Court has ruled that the British telecom giant Vodafone does not have to pay taxes and penalties for the transaction in 2007 that saw the company acquire a 67 percent stake in Indian mobile phone operator Hutchison Essar. The deal was for US$11.5 billion, and absolves Vodafone from a potential tax liability of US$2.5 billion.

The Supreme Court said that Indian tax officials do not have jurisdiction over a deal between two global companies, even if the assets involved in that deal are located in India. The ruling is expected to boost foreign investor confidence in India, and the M&A sector in particular.

Vodafone had argued that India cannot levy taxes because the transaction was made between non-Indian companies outside of the country. Specifically, the deal was between Vodafone International Holdings BV (a Dutch subsidiary of the UK firm) and CGP Investments Ltd. (a Cayman Islands company which held the Indian telecom assets of Hutchison). Vodafone lost the original case in the Bombay High Court in 2008 and then appealed against that verdict in the Supreme Court.

Indian tax officials said the sale was taxable because the assets acquired by Vodafone are based in India and Vodafone had failed to deduct or withhold capital gains tax at the time of purchase. Capital gains tax is imposed on the profit earned after selling an asset. In Vodafone’s case, those profits had been generated by Hutchison Essar, yet as Hutchison Essar was sold and the assets no longer belonged to them, the court had ruled that Vodafone should instead be liable to pay the equivalent of Hutchison’s capital gains tax on the purchase.

After the verdict was delivered, Finance Minister Pranab Mukherjee met with Law Minister Salman Khurshid and issued a statement.

“We obviously need revenue for the government’s important programs and the other thing is the certainty in law; we have to examine both areas,” read the statement.

The Supreme Court has also ordered the Income Tax Department to return bank guarantees deposited by Vodafone when the Supreme Court began hearing the case. A further eight companies are facing similar litigation, with GE, SAB Miller, Cadbury, AT&T, Sanofi, and Vedanta among companies fighting tax cases in India that could now be affected by the Vodafone precedent.

The news has already had an immediate effect on M&A transactions as Dell have just announced plans that they intend to acquire an Indian tech firm with a war chest of close to US$1billion to do so, according to Suresh Vaswani, chairman of the company’s India operations. The acquisition comes as Dell wants to ramp up competition with IBM and Accenture in the country.

The target company is expected to have “several thousands of staff and revenues of between US$500 million and US$1 billion” according to Vaswani.

“This removes a substantial barrier to foreign investment into India and does away with a significant amount of uncertainty within the M&A sector,” comments Chris Devonshire-Ellis, principal at Dezan Shira & Associates. “This welcome ruling establishes a precedent and means that much-needed foreign investment, technology and expertise can be injected into target companies without the uncertainty of facing huge tax bills as an additional acquisition expense.”

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.