India's Supreme Court has ruled that Vodafone did not have to withhold tax from Hutchison Telecommunications when buying its stake in 2007 in Indian mobile operator, Hutchison Essar, Vodafone said on Friday.
The dispute between Vodafone and India's tax authorities had emerged as a test of the consistency of India's regulatory framework and its commitment to attract investments in telecommunications and other sectors.
There is concern among foreign investors about the transparency and predictability of dealings in the telecommunications sector, and this decision will help to an extent, said Kamlesh Bhatia, a principal research analyst at Gartner.
Vodafone was asked by India's tax authorities to pay over US$2 billion for not collecting tax from Hutchison when it paid $11 billion to acquire a 67 percent stake, both directly and indirectly through Indian partners, in joint venture Hutchison Essar. The mobile operator was subsequently renamed as Vodafone Essar.
India's income tax laws require that tax should be deducted before a payment is made to a foreign company or nonresident for assets in India. But Vodafone argued that it is not liable to pay tax on the transaction, which was executed outside the country by two foreign companies.
It is not clear at this point as to what was the reasoning adopted by the Supreme Court when deciding the case.
Vittorio Colao, CEO of Vodafone, said in a statement soon after the court's decision on Friday that the company is committed to be a long-term investor in India, and will continue to grow its Indian business, including making significant investments in rural areas and in 3G network coverage.
Vodafone said last year it was acquiring the 33 percent stake of Indian partner, Essar Group, in the joint venture. The joint venture has been renamed as Vodafone India.
As of Nov. 30, Vodafone had 147 million subscribers in India, and was the third largest operator by number of subscribers after Bharti Airtel and Reliance Communications.
The tax case is however just one of a number of irksome regulations facing mobile operators in India, Bhatia said. The government has for example recently blocked roaming pacts by operators, which would allow their 3G subscribers to have services across multiple services areas even if their operator didn't have a license to operate in some of the service areas.
The rules in a number of other areas such as buying and selling spectrum, and mergers and acquisitions in the telecom sector are still not finalized, Bhatia said.
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