20th January 2012

In a landmark decision by India’s Supreme Court today (20th January 2012), Vodafone won its case against the Indian tax authorities, who had been asserting that the company had an Indian tax liability of $2.2bn as a result of its $11.2bn acquisition of Hutchison Telecom’s 67% stake in an Indian joint venture company in 2007. The Supreme Court overturned the earlier High Court decision in 2010 and ordered that Vodafone be repaid around $500m that it had deposited with the tax authorities, with interest.

Kevin Phillips, Corporate Tax partner and international tax specialist at Baker Tilly, explains: “The case represents a huge relief, not just for Vodafone, but for a host of other large multinationals that have undertaken similar deals in India and that were anxiously awaiting the outcome. The case effectively restores the previously widely understood order, and gives much needed confidence to existing and future foreign investors, and not just in India. There are a number of other important territories that also tax capital gains made by foreign investors on disposals of shares in companies in their territory (notably China). If the Indian Supreme Court had upheld India’s right to tax an indirect disposal of shares in an Indian company in this way, it could have cast doubt on the treatment of similar transactions in other territories. Foreign investors in such territories can breathe a little easier as a result.

“The case centred on the fact that, under its domestic law, India is entitled to levy capital gains tax (CGT) on foreign investors when assets situated in its territory change hands. This includes sales of shareholdings in Indian companies. However, although the 67% stake in the joint venture that Vodafone purchased from Hutchison Telecom was ultimately in an Indian company, Hutchison Essar Ltd, this shareholding did not in fact change hands. Rather, Vodafone purchased from Hutchison Telecom’s Hong Kong parent company a Cayman Islands subsidiary that owned the stake in the Indian company.

“As this transaction was carried out between two non-Indian companies, outside India, and the sale was of shares in a Cayman company, Vodafone took the view that India had no jurisdiction to tax the gain that arose for Hutchison Telecom. Most international tax advisers took the same view, so it came as a huge shock when India asserted that nonetheless, it had the right to tax the gain arising. Worse still, it did not pursue the seller, Hutchison Telecom for the tax, but rather the purchaser, Vodafone, on the grounds that Vodafone should have withheld $2.2bn from the sales price it paid to Hutchison Telecom and paid it over instead to the Indian tax authorities, as is required under Indian law where such a transaction is within the scope of Indian CGT.”

About Vodafone

Vodafone is one of the world's largest mobile communications companies by revenue with approximately 391 million customers in its controlled and jointly controlled markets as at 30 September 2011. Vodafone currently has equity interests in over 30 countries across five continents and more than 40 partner networks worldwide. For more information, please visit www.vodafone.com