Vodafone Wins $490 Million Tax Dispute in Bombay High Court

Mumbai: The Bombay High Court ruled in favour of Vodafone on Friday in a long-running dispute with the Indian taxman, a boost for the British telecom group whose tax battles have been seen as emblematic of the troubles facing foreign investors in India.

Vodafone, the biggest foreign corporate investor in India, has been caught in a string of tax disputes since it entered the country seven years ago, hoping to tap the world's second-biggest mobile phone market by customer numbers.

Vodafone's treatment, seen by many investors as heavy-handed, has fuelled debate over India's unpredictable rules and regulations.

In the case decided on Friday, the tax department had accused Vodafone India Services Private Ltd - a unit of the group - of under-pricing shares in a rights issue to its parent, and had demanded tax of about Rs 3,000 crore ($490 million).

The tax demand was for two financial years to March 2011, Vodafone said.

"Vodafone has maintained consistently throughout the legal proceedings that this transaction was not taxable," the company said in a statement welcoming the ruling.

Transfer pricing is the value at which companies trade products, services or assets between units in different countries - a regular part of doing business for a multinational, but a practice which tax authorities often feel can be exploited.

Rules require all cross-border transactions between group companies to be valued at arm's length - or as if the transaction was with an unrelated company.

Several other multinational including IBM Corp, Royal Dutch Shell Plc and Nokia Oyj are also fighting transfer-pricing cases in India. Tax claims on foreign firms in the past year has been a major concern for investors.

"The decision will set to rest a lot of controversies and would go a long way in encouraging foreign investments," S P Singh, a senior director at Deloitte Haskins and Sells, said after the court ruling.

Separately, Vodafone is contesting a more than $2 billion tax demand over its acquisition of Indian mobile operations in 2007 from Hutchison Whampoa.

The lure of India's growing market, however, has continued to attract Vodafone. This year it spent $1.7 billion to fully own its main Indian unit, Vodafone India Ltd, which is the nation's No.2 mobile phone carrier. Vodafone India bought radio airwaves worth more than $3 billion in a government auction in February to beef up services.

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