UPDATE 2-Court rules against Vodafone in India tax case

* India court dismisses Vodafone petition against tax dept

* Tax dept has jurisdiction in cross-border deals-court

* Sets precedent for foreign firms targeting India cos

* Vodafone shares down 0.4 percent

(Adds details, background, comment, updates shares)

By Prashant Mehra & Sumeet Chatterjee

MUMBAI, Sept 8 (BestGrowthStock) – India’s tax department has
jurisdiction over tax bills in cross-border mergers, a court
ruled, dismissing a petition by Vodafone (VOD.L: ) and setting a
precedent for overseas firms looking to buy into Indian
companies.

The Bombay High Court ruling came as foreign firms show
renewed interest in acquiring Indian companies, lured by growth
prospects in the world’s second-fastest growing major economy.
But the decision may prompt overseas firms to be more cautious
about plans to enter India through acquisitions.

“This will make the deals costlier for strategic buyers and
private equity firms,” said Jagannadham Thunuguntla, equity head
of SMC Capital. “Investors who are planning to enter into India
hoping there will be no tax liability will think twice.”

Vodafone, fighting a tax bill in India from its 2007
purchase of Hutchison Whampoa Ltd’s (0013.HK: ) mobile business in
the country, had filed an appeal with the court in June
challenging the tax department’s jurisdiction over the bill.

The world’s largest telecommunications operator by revenue,
which paid $11.1 billion for the deal with Hutchison, has not
said how much the authorities were seeking. A person with
knowledge of the matter earlier told Reuters it was about 120
billion rupees ($2.6 billion).

Indian tax authorities have said Vodafone’s deal was liable
for tax because most of the assets were based in India and under
Indian law, buyers have to withhold capital gains tax
liabilities and pay them to the government.

“I don’t think this will be a major roadblock for M&A deals
in India, but the tax issue will be much more on the people’s
radar than it was before,” said an investment banker with a
leading foreign bank in India. “The companies are now going to
assess their tax liabilities before entering into a deal.”

ANOTHER SETBACK

London-listed Vedanta Resources (VED.L: ), which agreed to buy
a majority stake in Cairn India from Cairn Energy (CNE.L: ) for up
to $9.6 billion, could face similar taxes, though the situation
was unclear as the deal has not closed yet. [ID:nLDE67F074]

Emirates Telecommunication Corp (ETEL.AD: ) has been mulling
investment in Indian telecom firms Reliance Communications
(RLCM.BO: ) and Idea Cellular (IDEA.BO: ). [ID:nLDE6860BQ]

Wednesday’s ruling marks another setback for Vodafone in
India, where the company has not met with the success it hoped
for when it bought into the market in 2007. In May it took a
charge of 2.3 billion pounds due to fierce competition and
rapidly escalating spectrum costs.

Chief Executive Vittorio Colao, frustrated with Indian
regulations covering the auction of 3G spectrum licences, said
then that telecoms rules in the world’s second-fastest growing
telecoms market did not make sense.

The Bombay High Court had concluded its hearing in
Vodafone’s appeal last month. “The petition is dismissed,” the
two judges who heard the case said in a ruling on Wednesday.
“The IT authority’s order can’t be held to lack jurisdiction.”

The court said India’s tax authorities would not issue a
final order to Vodafone for the next eight weeks, even though
tax proceedings would continue. Vodafone was free to separately
raise with them the issue of its liability to deduct tax on the
transaction, the judges said.

A spokesman for Vodafone in India had no immediate comment.

Vodafone earlier said Indian law did not require it to
deduct tax and that capital gains tax is usually paid by the
seller.

Vodafone is elsewhere pursuing a strategy to exit
non-strategic minority investments and said on Tuesday it sold
its 3.2 percent stake in China Mobile (0941.HK: ) for $6.6
billion. [ID:nTOE686080] [ID:nTOE68702E]

Vodafone shares were down 0.4 percent at 159.3p by 1154 GMT.
(Writing by Pratish Narayanan; Editing by Jui Chakravorty and
David Holmes)
($1=46.7 rupees)

UPDATE 2-Court rules against Vodafone in India tax case