Indian tax ruling buoys Vodafone

Shares in Vodafone (VOD) began rising on Friday on the news that the Indian Supreme Court has overturned an earlier tax ruling against it from a lower court.

The long-running battle centres around a $2.2 billion (£1.4 billion) tax bill relating to its 67% interest in Vodafone Essar, the Indian mobile unit of Hutchison Whampoa in which Vodafone invested over $11 billion in 2007. The new court ruling - which overturns a decision made by the Bombay High Court in 2010 - means that India's tax office has no jurisdiction over Vodafone's purchase of mobile assets in the country.

The Supreme Court has asked the tax office to refund 25 billion rupees (c£320 million) with 4% interest to Vodafone, according to Reuters.

Indian authorities had said the deal was liable for tax because most of the assets were based in India and because under local tax law, buyers have to withhold capital gains tax (CGT) liabilities and pay them to the government. But Vodafone believed the Indian tax office had no right to tax the transaction between two foreign entities, and even if any tax is to be paid, it should be paid by the seller not the buyer.

"Investors want more exposure in emerging markets and Vodafone certainly fits the bill for many," commented Mike McCudden, Interactive Investor's head of retail derivatives.

"Furthermore," he added, "by winning its court case around CGT liabilities on its purchase of Hutchison Essar, and potentially saving itself $2.2 billion, it has shown that it knows how to operate in India's notoriously difficult business environment. This ruling should act as the launch pad for further expansion into this booming market."

Vodafone, the world's largest mobile operator by revenue, is the third-largest mobile carrier in India by subscribers and has the second-largest revenue market share. But it has been a challenging market for the telcomms giant, despite its rapid growth there.

It had to wear a £2.3 billion impairment charge on its Indian operation in 2010 due to severe competition and escalating spectrum costs. Its relationship with Indian partner Essar was fraught with tension and marked by public spats before Vodafone bought out Essar's share of the deal for $5 billion.

Looking ahead, any plans for an Indian initial public offering remain some way off.