The Supreme Court of India has ruled in favour of Vodafone in its Rs 11,000 crore tax dispute case, reports Economic Times. It said that the Indian Tax Department had no jurisdiction to tax the transaction since it happened offshore in Caymen Islands between two foreign entities Hutchison Telecommunications International Limited (HTIL) & Vodafone International Holdings (VIH), which was basically Vodafone’s argument earlier. The court also noted that HTIL or VIH was not a short time investor and had existed since 1994, contributing around Rs 20,242 crores by the means of direct and indirect taxes on its business operations in the country.

The Supreme court ordered the Income tax department to return Rs 2,500 crore deposited by Vodafone in 2010, in the next two months, along with interest calculated at the rate of four percent per annum. from the date of withdrawal by the department up to the date of payment. It also ordered its registry to return the Rs 8,500 crore bank guarantee deposited by Vodafone within the next four weeks.

In a media statement responding to the Court ruling, Vodafone said:

Vodafone has maintained consistently throughout the legal proceedings that this transaction was not taxable and we are pleased with today’s judgment in the Supreme Court.

Vittorio Colao, CEO of Vodafone, said: “We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system. We welcome the Supreme Court’s decision, which underpins our confidence in India. We will continue to grow our Indian business – including making significant investments in rural areas and in 3G network coverage – for the benefit of Indian consumers.”

The Aftermath

There are two ways the aftermath of this verdict is likely to play out: firstly, the verdict sets a precedent in case of mergers and acquisitions in India, in that a deal done outside the jurisdiction of India will not be taxable. This comes as a relief for companies looking at potential M&A in India, since many businesses which have raised funds have done so through entities set up in Mauritius and/or Cayman Islands. For a country looking to increase foreign investment in India, and for companies looking to sell stake, this augurs well.

On the flip side, as the Economic Times reports, given that the government believes it lost money in tax revenues, it may look at ways to ensure it makes money on such offshore deals. This judgement could set a precedent to similar merger and acquisition deals which has been under the Income Tax Scanner. This includes the $150 million deal between Idea cellular and AT&T; $500 million deal between GE and Genpact; and $981 million deal between Mitsui and Vedanta, as noted by Business Standard. It’s tricky for them, since that could adversely affect FDI and FII inflows into the country.

Vodafone- IT Dept Case Timeline

– Vodafone was first served a show cause notice in September 2007 which it challenged in Bombay High court in October 2007.

– The Bombay High court however dismissed the petition in December 2008, allowing the Tax department to proceed on the show cause notice.

– The company was served another showcause notice in October 2009 and an order was passed by the Tax Department in May 2010, claiming jurisdiction to tax the transaction.

– Vodafone challenged this order in June 2010 through a writ petition in the Bombay High Court which was later dismissed in September 2010, and the Court ruled that the tax authority had jurisdiction to decide whether the transaction or some part of the transaction could be taxable in India.

– Vodafone appealed this decision to the Supreme Court in September 2010.

– On 22 October 2010, the Indian tax authorities issued a demand for payment of Rs 112.2 billion/ Rs 11,2200 crore (£1.6 billion) tax and interest since it believed the underlying assets were Indian.  Vodafone contested the amount since the IT dept. had calculated the amount without speaking with Hutch and that it believed that no tax was due howsoever.

– In November 2010 Vodafone was asked to make a deposit with the Supreme Court of Rs 25 billion/Rs 2500 crore (£356million) and provide a guarantee for Rs 85 billion (£1,188million) pending final adjudication of the case.

– In March 2011, Vodafone received a notice from the IT department requesting it to explain why it should not be liable for penalties of up to 100% for any tax found due.

– In April 2011, The Supreme Court stayed the tax authorities from enforcing any liabilities for penalties until after the outcome of the Supreme Court hearing.