India’s reputation as an investment destination has taken a hit over the past year as the economy slowed, government pledges of policy overhauls stalled and corruption scandals — notably in the telecommunications industry — heightened investors’ concerns.
“All this talk about uncertainty for foreign investment — well, I hope for one area, this judgment clears the air,” Harish Salve, a lawyer for Vodafone, said after the verdict was announced Friday.
The verdict, which sent Vodafone shares up 2 percent in afternoon trading in London on Friday, was a rare piece of positive news for foreign investors in India over the past few months.
Just last month, plans to open up the country’s $450 billion retailing sector to global supermarket operators were derailed by political opposition.
Investment proposals in India plunged 45 percent last year, to a five-year low, as companies halted projects, many citing bureaucratic hurdles and administrative gridlock, according to the Center for Monitoring Indian Economy.
“I think it’s a good decision,” said Pranav Sayta, a tax partner at Ernst Young. “It will help investments into India. It’s definitely good for the industry. The confidence level on the Indian judicial process should certainly go up now.”
The tax bill was related to Vodafone’s $11 billion deal to buy Hutchison Whampoa’s Indian mobile business in 2007. The company, based in Britain, had appealed to the Supreme Court after losing the case in the Bombay High Court in 2010.
Vodafone, the world’s largest mobile operator by revenue, had argued that the Indian tax authorities had no right to tax the transaction between two foreign entities.
Even if tax were due, the company said, it should be paid by the seller, not the buyer.
The Indian authorities had said the deal was liable to be taxed because most of the assets were in India and because under local tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.
The court ruled that the Indian tax authorities had no jurisdiction over Vodafone’s purchase and ordered the tax office to refund to Vodafone the 25 billion rupees, or $496 million, it had been asked to deposit pending a ruling.
It also ordered the tax office to pay Vodafone 4 percent interest on the funds.
Vodafone is the largest overseas corporate investor in India but has come to symbolize the perils foreign companies face doing business in the country.
While it became one of India’s largest mobile carriers by subscribers, the company took an impairment charge of $3.56 billion on its Indian operations in 2010 because of cutthroat competition and skyrocketing spectrum costs.
“We are a committed long-term investor in India,” Vittorio Colao, the Vodafone chief executive, said in a statement. “We will continue to grow our Indian business — including making significant investments in rural areas and in 3G network coverage.”
Vodafone agreed to buy out its Indian partner, Essar Group, for $5 billion last year, putting an end to their highly fractious relationship that had spilled into the open.
Vodafone has said it has plans for an initial public offering of shares in its Indian business but has not set a timeframe.
Robin Bienenstock, an analyst at Bernstein Research in London, said she expected Vodafone to announce an I.P.O. for 30 percent of the Indian business this year that could raise £3.4 billion, or $5.23 billion.
In a note, Ms. Bienenstock said the ruling “will reassure investors, the majority of whom we think had resigned themselves to Vodafone being required to pay, and also to those who suspected that the final liability may have been greater than the original demand.”
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