India’s Supreme Court Affirms Dismissal of Vodafone Claim

By Ketaki Gokhale and Pratap Patnaik - Mar 20, 2012

India’s Supreme Court reaffirmed its earlier dismissal of a $2.2 billion tax claim on Vodafone Group Plc (VOD) after the government last month petitioned it to reconsider its decision.

A panel of judges comprising Chief Justice S.H. Kapadia, K.S. Radhakrishnan and Swatanter Kumar yesterday rejected a government plea to review the court’s January decision to dismiss a tax claim on Newbury, England-based Vodafone’s 2007 purchase of Hutchison Whampoa Ltd. (13)’s India operations, the court master said citing the chief justice.

The dismissal comes after Finance Minister Pranab Mukherjee last week in his annual budget speech proposed an amendment in the law that will enable the government to retrospectively tax cross-border transactions. Once the government makes the change in the law, it could petition the nation’s top court again, Dinesh Kanabar, deputy chief executive officer at KPMG’s India operations, said.

“The law provides that once the amendment is done, they will override any judgments of the court,” said Kanabar. “Vodafone would, obviously, need to prepare for something like that.”

Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd., a Cayman Islands company controlled by Hong Kong-based Hutchison.
`Unambiguous'

“The Supreme Court’s clear and unambiguous ruling, based on the existing laws of India, reiterates that the Indian tax authority does not have the jurisdiction to tax the transaction,” Vodafone said in an e-mailed statement.

Vodafone rose 2.1 percent to 170.80 pence in London.

India’s Supreme Court on Jan. 20 ruled the government can’t seek capital gains tax from Vodafone because the transaction occurred between foreign companies. The court also directed the government to return a 25 billion-rupee ($495 million) deposit Vodafone made on the contested tax bill, plus 4 percent interest.

The government will immediately return the deposit made by Vodafone, a finance ministry official told reporters in New Delhi yesterday, asking not to identified before a public announcement.

The government on Feb. 17 filed a petition to review the Supreme Court’s decision, seeking to overturn the January ruling.

The Indian tax department sought 112.2 billion rupees in capital gains levy from Vodafone, saying the company should have withheld the tax from its payment to Hutchison.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; Pratap Patnaik in New Delhi at ppatnaik2@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net
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