NEW DELHI -- India's highest court Friday gave Vodafone Group PLC investors a multi-billion dollar reason to celebrate, ruling that the country's authorities do not have the right to tax its $11.2 billion purchase of a majority stake in Hutchison Essar Ltd. in 2007.
The decision could result in Vodafone being able to avoid handing over around $2.2 billion in taxes, which it says it shouldn't have to pay because the deal was conducted overseas.
India's tax authorities can file for a review of the ruling, but it isn't clear yet whether they will choose to do so.
The case is being closely watched by foreign companies with investments in India, and they were waiting for clarity on the country's tax regime.
The uncertainty created by the case is already viewed as one reason why foreign direct investment has declined in India.
The country received $30.38 billion of FDI in the fiscal year through March 2011, about 20% lower than in the previous fiscal year. India has received about $27.88 billion of foreign direct investments in 2011's April-October period.
The case concerns Vodafone's $11.2 billion purchase of a 67% stake in Hutchison Essar, India's second-largest mobile operator by revenue, from Hong Kong's Hutchison Whampoa Ltd.
This was Vodafone's first move into the Indian market.
When asked to pay tax in India, the U.K.-based company argued that--since the purchase was made by a Vodafone holding company in the Netherlands, and Hutchison Essar was registered in the Cayman Islands--no capital gains tax is due in India since neither company involved in the purchase is Indian.
Even if tax were due in India, it is the seller, Hutchison, and not the buyer which should pay it, Vodafone said.
The company challenged a lower court ruling which allowed Indian local authorities to charge 112.18 billion rupees ($2.23 billion) in capital gains tax and interest on the transaction. The company also appealed against a penalty for non-payment of the tax, which it said could amount to 100% of the taxable amount, taking the total sum to nearly $4.5 billion.