Vodafone in legal battle over £1bn tax bill for Indian deal

A five-day hearing starts in the Mumbai High Court today to decide whether Vodafone could owe the Indian tax authorities some $2bn (£1bn) for its $11.2bn takeover of one of the subcontinent's major mobile phone networks.

When Vodafone bought a controlling stake in Hutchison Essar from the Hong Kong-based Hutchison conglomerate in May last year, the UK group's advisors confirmed that because the deal was between two foreign companies, no tax was due to the Indian authorities. But the Indian government does not agree, and the row is set to run and run.

This week's hearing will decide on the validity of a Vodafone writ seeking an injunction against the tax authority's investigation of the deal. Whichever way the court rules, and a decision is not expected for a number of weeks, it is likely that the losing side will lodge an appeal with the High Court in Delhi.

The case has major implications for all foreign companies pursuing Indian assets. Vodafone's argument, and the basis of its writ, is that the company cannot owe tax on the deal because the transfer of shares took place between a Dutch group owned by Vodafone and a Hutchison company registered in the Cayman Islands, both of which are outside India's jurisdiction. But the government says that it does have a capital gains claim because the assets are based on Indian soil.

The dispute started last year, and was complicated further by a retrospective change to the Indian tax laws in February's Budget. The initial January hearing lasted only five minutes because the tax authority needed more time to prepare its case, and the subsequent March trial was adjourned so that Vodafone could incorporate the legal changes into its submission.

Even with the changes, the company remains adamant that its case is valid. "Vodafone continues to believe and has been advised that there is no tax payable on the transaction," a spokesman said at the time.

Vodafone is not the only global group to be caught up in potential tax disputes with the Indian government. Though subtly different from the Vodafone case, deals by General Electric and AT&T in recent years are now also coming under scrutiny from the subcontinent's revenue authorities.

The Vodafone case will be watched closely by multinationals thinking of investing in India's fast-growing economy. The takeover of Hutchison Essar was central to plans by Vodafone to secure future growth by expanding into emerging economies.