India begins hearing Vodafone tax bill challenge

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India's top court began hearing a challenge Wednesday by British phone giant Vodafone to a huge tax bill over its purchase of a local phone operator in what is seen as a test case for foreign investors.

India slapped the $2.5 billion tax bill on Vodafone last October over its $11.1 billion purchase four years ago of a 67-percent stake in Hong Kong-based Hutchison Whampoa's Indian mobile unit.

The Indian company, now known as Vodafone Essar, is the third-largest mobile operator in India's fiercely competitive mobile market.

The landmark case before India's Supreme Court is being closely watched by international investors with experts saying the outcome could have implications for big-ticket purchases of Indian firms by other foreign companies.

Wednesday's initial proceedings before the three-judge Supreme Court bench lasted an hour.

Vodafone, the world's largest mobile operator by subscribers, has said it expects a judgement by year end.

It argues the purchase deal was between two companies based outside India while Indian authorities counter that tax must be paid on the transaction because it involved an asset based in India.

Vodafone maintains Indian law did not require it to deduct tax because the deal took place in the Cayman Islands and both buyer and seller were foreign.

Vodafone also notes it was the purchaser and not the seller and made no gain on the transaction.

Indian tax authorities say Vodafone should have withheld the amount the vendor was due to pay in tax when it bought the stake and are seeking $2.5 billion from Vodafone, plus up to an equivalent sum in penalties.

Foreign direct investment in India plunged in the past year amid investor concern over widespread corruption, bureaucratic delays, a lack of economic reform and an uncertain regulatory climate.

India's tax laws are "being reinterpreted in a completely new way" by the government, Vodafone said before the court case began.

Vodafone's foreign investment in India, the world's fastest-growing mobile market, was intended as a move to expand revenues in the face of saturated cellular markets in Western Europe.

But the firm has had a difficult time. It wrote off 2.3 billion pounds ($3.7 billion) in 2010 citing ferocious rivalry among the more than one dozen players in the Indian market that has driven call costs to below one cent a minute.

© 2011 AFP

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