A landmark tax case between Vodafone of the UK and the Indian government that is set to determine the future climate for mergers and acquisitions in the country began on Monday.
Bombay high court heard the opening arguments of a petition from Vodafone International Holdings against a move by the tax department to claim an estimated $2bn worth of capital gains tax on the UK group's acquisition of domestic mobile operator, Hutchison Essar, last year.
The decision of the court to commence the long-awaited hearing, which will be held at 3pm Indian time every day this week, took participants by surprise after prolonged delays in the case in India 's overloaded court system.
"When we saw the judge's (schedule) as it stood last Friday, he had 15 different matters scheduled for 3pm today," said one lawyer familiar with the case.
The case will be critical to the future of investor sentiment in India . Vodafone made the country's largest foreign direct investment last year when it paid Hong Kong's Hutchison group $11bn for a controlling 67 per cent stake in Hutchison Essar, India 's third-largest mobile operator.
But after the transaction, Vodafone was notified by the tax department demanding to know why it did not withhold, on behalf of the government, capital gains tax on the acquisition.
While Vodafone was the buyer and Hutchison of Hong Kong the seller that made the capital gain, the government claims the buyer, in this case Vodafone, is liable because it should have withheld the tax from Hutchison on its behalf.
Vodafone argued that under Indian law, such overseas transfers of "beneficial ownership" are not taxable even if the bulk of the assets are in India because the exchange of the "capital asset", the shares, took place in a foreign jurisdiction.
The Hutchison Essar sale was between a Dutch company, owned by Vodafone, which paid $11bn to a Cayman Island entity, owned by Hutchison, for another Cayman Island company that indirectly held a controlling stake in India -based Hutch-ison Essar.
Vodafone told the judge that even if the transaction was taxable, there was no withholding obligation on the UK group.
It also said a recent amendment to the tax law to penalise entities that did not withhold tax when required was unconstitutional because it was retrospective.
Vodafone is expected to wrap up its plea to the judge tomorrow after which the tax department will commence its presentation.
India 's tax department has also contacted Genpact India , an outsourcing company, over the sale by its former controlling shareholder, General Electric, of a large stake to two private equity firms in 2004.
