New Delhi, January 20
In a far-reaching judgment the Supreme Court today upheld the appeal filed by Vodafone International Holding (VIH) and ruled that Vodafone need not pay Rs 11,000 crore towards Income Tax and Capital Gains Tax for purchasing Hutchison Ltd’s Indian mobile business in 2007.

The ruling sent Vodafone shares surging in London and delighted analysts said that the ruling would go a long way in restoring investor confidence in India and the Indian judicial system. It would also facilitate more inflow of foreign funds and allow more mergers and acquisitions, they hoped.

No reaction was immediately available from the Government, although Union Finance Minister Pranab Mukherjee and the Union Law Minister Salman Khurshid are learnt to have conferred on the fallout of the landmark ruling.

A three-member Bench headed by Chief Justice SH Kapadia directed the Income Tax Department to return within two months the Rs 2,500 crore deposited by VIH as directed by the SC with four per cent interest. The Bench held that India tax authorities had no jurisdiction over transactions done abroad, in Cayman Islands in this case.

The ruling is expected to stimulate FDI flows into the country. The apex court observed: “Tax policy certainty is crucial for taxpayers, including foreign investors, to make rational economic choices in the most efficient manner”.

The Income Tax department had initiated the process to levy tax claims on several such M&A (Merger & Acquisition) transactions. Vodafone, one of the largest telecom operators in the world, said in a statement that it has maintained consistently that this transaction was not taxable.

Vodafone Group Chief Executive, Vittorio Colao, said, “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. We welcome the Supreme Court's decision, which underpins our confidence in India. We will continue to grow our Indian business - including making significant investment in rural areas and in 3G network coverage - for the benefit of Indian consumers.”

“This landmark decision will enhance the trust of the international investors,” said Dr Rajiv Kumar, Secretary General, FICCI. Saurabh Agarwal, Director of Mumbai based Kennis Consultancy, said the ruling upholds the principle that “in the absence of contrary provisions in the law, the offshore M&A deals involving Indian assets could not be taxed by deeming holding structures as tax avoidance vehicles”. Agarwal said the Income tax department’s contention, if upheld, would have rendered standard transaction structures too risky, forcing foreign companies to weigh litigation and insurance costs.