The Supreme Court of India has rejected the government’s review petition in the Vodafone Tax Case, which it had filed after the Cort had passed a judgement in Vodafone’s favour. Vodafone has issued a statement informing the media about the Court’s decision, and said that it looks forward to the immediate return of its deposit from the government. According a report by NDTV, the government has already refunded the deposit of Rs 2500 crore plus 4% interest to Vodafone. A company spokesperson also confirmed the receipt of the amount to the publication.

Vodafone’s media statement:

The Supreme Court has dismissed the Indian Tax Authorities review petition against the judgment in the Vodafone case.

This once again emphasises the legality and bona fides of the transaction.

The Supreme Court’s clear and unambiguous ruling today, based on the existing laws of India, re-iterates that the Indian tax authority  does not have the jurisdiction to tax the transaction.

We look forward to the return of our deposit immediately.”

In January, the Supreme Court of India had ruled in favour of Vodafone in its Rs 11,000 crore tax dispute case with the Government, rejecting a claim made by the Government demanding for a payment of Rs 112.2 billion/ Rs 11,2200 crore (£1.6 billion) tax and interest for a transaction in Caymen Islands between foreign entities Hutchison Telecommunications International Limited (HTIL) & Vodafone International Holdings (VIH). The Indian government believed that the underlying assets in the company were Indian. The Court had said that the Indian Tax Department had no jurisdiction to tax the transaction since it happened offshore. The government now, has no other option except for filing a curative petition.

Impact of the proposed Amendment in IT Act On the Vodafone Transaction

However, in the Union Budget 2012, it has proposed a change in the Income Tax law and has clarified the definitions of ‘property’ and ‘transfer’ in the Finance Bill chapter . Interestingly, the definition has been inserted in retrospect, with effect from, 1st April 1962. This could have an impact on M&A deals carried out outside the Indian territory, which could also include the Vodafone – Hutch deal. After the Supreme Court judgement in favour of Vodafone, it was expected that the government would find a way out, given that it believed that it lost money in tax revenues.

The Finance Bill, chapter III on Direct Taxes and Income Tax, mentions – “For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

It further says – “It is clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

Now with the clarification, enforced in retrospect, the Government could use it to tax Vodafone if the amendment is passed as part of the Budget. This could also affect other deals including a deal between Idea cellular and AT&T; $500 million deal between GE and Genpact; and $981 million deal between Mitsui and Vedanta.

We had written to Vodafone, asking for the company’s view on the development, however we have still not received a response from them.