Vodafone Group Plc (VOD), the world’s biggest mobile-phone company, doesn’t have to pay $2.2 billion in taxes on its purchase of Hutchison Whampoa Ltd. (13)’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 Vodafone made on the contested tax bill, plus 4 percent interest.

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

The decision also 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 Chief Executive Vittorio Colao 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.

Focus on India

The ruling underpins Vodafone’s confidence in India, and the company will invest in its third-generation wireless network, Colao said today. Shares of Newbury, England-based Vodafone rose 1.8 percent to 177.65 pence as of 9:59 a.m. in London trading, set for its biggest gain since Dec. 13.

“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.”

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.

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.

Foreign Investment

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

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. “The judgment implies that it is not for tax authorities to decide what is capital gains.”

Read More:  http://www.bloomberg.com/news/2012-01-20/vodafone-doesn-t-have-to-pay-tax-on-indian-hutchison-purchase-court-says.html