By Pratap Patnaik and Ketaki Gokhale

(Updates with Hutchison Whampoa comment in 12th paragraph.)

Jan. 20 (Bloomberg) -- Vodafone Group Plc, the world’s biggest mobile-phone company, doesn’t have to pay $2.2 billion in taxes on its 2007 purchase of Hutchison Whampoa Ltd.’s India operations, the nation’s top court said.

The government can’t seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets because the transaction occurred between foreign companies, according to the ruling by a Supreme Court panel headed by Chief Justice S.H. Kapadia. The court also directed the government to return a 25 billion-rupee ($496 million) deposit Newbury, England-based Vodafone made on the contested tax bill, plus 4 percent interest.

“This allows Vodafone to focus more on the Indian operations, focus more on getting more subscribers, being more profitable rather than fighting on the tax side of it,” Romal Shetty, executive director of the telecommunications division at KPMG’s Indian unit, told Bloomberg UTV. “It’s a shot in the arm. But even from an industry perspective, it’s a boost.”

The decision ends more than four years of uncertainty over whether investors based outside the country can use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in one of its fastest-growing mobile-phone markets, had said the case was one of the key issues that had to be resolved in the region before the company could consider publicly listing its local unit.

‘Long-Term Investor’

“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,” Vodafone Chief Executive Officer Vittorio Colao said in an e-mailed statement. “We will continue to grow our Indian business, including making significant investments.”

Vodafone rose as much as 2.5 percent in London trading and was up 1.9 percent as of 11:59 a.m. The stock has gained 3 percent in the last 12 months, while the 35-member Bloomberg Europe Telecommunications Index dropped 15 percent.

Vodafone is seeking an initial public offering of its unit Vodafone India Ltd. The listing is a “longer-term” option and can’t happen in an uncertain regulatory environment, Colao said in July.

“The judgment will boost capital investments into India as some tax uncertainty will go away,” Harish Salve, counsel for Vodafone, said today.

Offshore Transaction

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

The Indian tax department in September 2007 sought 112.2 billion rupees in capital gains tax, saying Vodafone should have withheld that amount from its payment to Hutchison.

“Such imposition of tax amounts to capital punishment on capital investments,” Justice K.S. Radhakrishnan said in his ruling issued in New Delhi today.

Hutchison Telecommunications International Ltd., a unit of Hutchison Whampoa, said in an e-mailed statement that it won’t comment on the decision as “this is a case between Vodafone and India’s income tax department.”

Vodafone expected that the bill could rise to $5 billion, including penalties, Chief Financial Officer Andy Halford told reporters in New Delhi in June. Such amounts “are quite big uncertainties if you are looking to invest in other countries,” Halford said.

Companies should wait to see how the dispute is resolved before making new investments in India, he said.

Law, Politics

“They took a position saying we’re right in this case, we’re not taking a provision,” said Will Draper, an analyst at Espirito Santo in London. “They said if we lose it, it won’t be a matter of law, it’ll be a matter of politics and they were vindicated.”

The Bombay High Court ruled in December 2008 against Vodafone’s challenge of the tax bill. The carrier’s appeal to India’s Supreme Court was dismissed in January 2009. At that time, the Supreme Court allowed Vodafone to present its challenge over the jurisdiction for the transaction to the tax department.

In May 2010, the tax department issued Vodafone another notice reasserting its jurisdiction, though not demanding immediate payment. Vodafone then went back to the Bombay High Court. There, the company’s lawyers argued that since the transaction took place between two overseas companies and the target asset was registered in the Cayman Islands, Vodafone didn’t owe taxes in India.

‘Indian Nexus’

The government argued that even though the share transfer was of a Cayman Islands entity, the deal had an “Indian nexus.”

On Sept. 8, 2010, the Bombay High Court dismissed Vodafone’s challenge of the tax department’s claim, saying Indian authorities had the jurisdiction to pursue the case.

Vodafone’s unit is India’s third-largest wireless operator, with 146 million subscribers and a 17 percent share of India’s 884 million mobile-phone accounts at the end of November, according to the nation’s telecommunications regulator.

Vodafone announced its $10.7 billion acquisition of a 67 percent stake in Hutchison Essar in 2007. Vodafone’s chief executive officer at the time, Arun Sarin, said he had plans to make the Indian venture a “raging success.” The carrier booked a $3.3 billion charge for the unit in May 2010, citing “intense price competition” in the Indian market.

--With assistance from Jonathan Browning in London, Mark Lee in Hong Kong and Rajhkumar Shaaw and Santanu Chakraborty in Mumbai. Editors: Arijit Ghosh, Michael Tighe, Simon Thiel.

To contact the reporters on this story: Pratap Patnaik in New Delhi at This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; Ketaki Gokhale in Mumbai at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

To contact the editor responsible for this story: Arijit Ghosh at This e-mail address is being protected from spambots. You need JavaScript enabled to view it