Vodafone's $2bn Indian tax dispute grinds on

Vodafone's hopes of resolving its dispute over whether it must pay $2 billion tax to the Indian authorities were dashed on Friday. The Supreme Court refused to hear the case, which is of intense interest to all foreign investors in the country. The Supreme Court referred the matter back to the tax authority for "initial deliberation".

This is somewhat ironic as the case has already been grinding on for two years: the tax authorities insist Vodafone should have paid tax on its $11bn acquisition of a 67% stake in domestic mobile operator, Hutchison Essar (now Vodafone Essar), two years ago. Vodafone bought the stake from Hong Kong's Hutchison.

India's tax authorities take the view that the UK group should have withheld an estimated $2 billion of capital gains tax on the deal on the government's behalf, while Vodafone insists that the transaction took place overseas between offshore companies. In the past offshore transactions had been exempted from taxation in India.

The sale was conducted through Dutch company, controlled by Vodafone, which paid the $11 billion to a Cayman Island entity run by Hutchison for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator, the Financial Times explains.

Vodafone lost a case in the Mumbai High Court challenging the tax department's right to assess it for tax on the transaction and had appealed to the Supreme Court.

The Supreme Court ordered that the case be returned to the tax department, which should determine whether it had the jurisdiction to tax Vodafone in the Hutchison Essar deal.

If the tax department determines that it has jurisdiction, the Supreme Court granted Vodafone the right to challenge the decision in the High Court.