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Vodafone manages to fight off £3bn tax bill, claws back cash paid

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Vodafone's acquisition of Hutchison Essar is not liable to Indian taxation, a court has ruled, as the 2007 transaction took place outside the sub-continent - despite Essar being based there.

Vodafone and Hutchison successfully argued at the Indian Supreme Court that as neither company is headquartered in India they don't have to stump up for local capital-gains tax, which could have hit £3bn once all the various penalties for late payment were included.

So now the Indian government will have to pay back the bonds and guarantees amounting to several hundred million quid which Vodafone was forced to hand over during the four years the case rumbled on.

The Indian tax office reckoned Vodafone should have handed over £1.4bn in capital gains tax before the deal was allowed to go through in 2007, and won a couple of rounds at court before the matter reached the Supreme Court whose ruling is final.

The issue was whether two foreign-owned companies trading an Indian company between them could be liable for Indian tax. Had Vodafone and Hutchinson been Indian companies then Vodafone would have been obliged to deduct the tax from the price paid to Hutch, passing it direct to the government.

The news will settle the minds of companies considering their investment in India, and is being heralded in the international press as a good thing, though the Indian tax authorities might feel differently. ®

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