Vodafone is facing a $2.6 billion bill (€2 billion), after an Indian high court dismissed the company's appeal against paying taxes on its $11.2 billion acquisition of what is now Vodafone Essar.
But the operator has not given up on the fight, and plans to take the battle to India's Supreme Court a Vodafone lawyer told WSJ.com.
The high court has ordered that the income tax department not issue a capital gains tax bill for at least eight weeks to give Vodafone time to appeal.
The decision could have implications for more historic foreign investments in India, although new mergers and acquisitions will be governed by a new Direct Taxes code, which is clear on foreign transactions, India's Economic Times reported.
Vodafone argued in court that it should not have to pay taxes on the 2007 acquisition of 67% of the then-Hutchison Essar from Hutchison Telecom International, because the transaction was between two foreign companies.
Even if tax is due, the operator argues, it should be Hutchison that has to pay.
“India has a sad tradition of screwing these things up, creating uncertainty and making foreign companies think this is a tough place to do business,” private-equity investor John Band told the Journal. “Normally you pick a fight with the sellers, not with the buyers.”
The transaction involved Vodafone purchasing Cayman Islands firm CPG Limited, an entity controlled by Hutchison, and acquiring a further 15% of the company by taking up options on shares held by Indian investors.
But a new point of contention has arisen over whether the entire transaction is taxable, or just the acquisition of the shares held in India. This is likely to be the substance of Vodafone's appeal to the Supreme Court.