New Delhi, Jan 20 (IANS): In a verdict which India Inc. says enhances the country's image among global investors, the Supreme Court Friday dismissed a hotly-opposed tax demand of $2.2 billion on Vodafone, pertaining to its majority buy of a telecom firm in 2007.

In the verdict, which experts say is no less than a landmark, a Supreme Court bench headed by Chief Justice S.H. Kapadia said Indian tax authorities had no jurisdiction over transactions abroad and quashed the Income Tax department's demand of capital gains tax from Vodafone.

The transaction pertains to 2007 when Vodafone Plc paid $11.2 billion to Hong Kong-based Hutchison for acquiring a 67-percent stake in Indian telecom services major Hutch Essar. The company has since been re-named Vodafone Essar.

The amount in question, of Rs.11,218 crore, is nearly three percent of India's budgeted fiscal deficit of Rs.412,817 crore for the current financial year.

Overturning the verdict of the Bombay High Court earlier, the apex court ruled that the Indian telecom company was not a fly-by-night operator and in existence since 1994. It had contributed Rs.20,242 crore by way of direct and indirect taxes to the exchequer.

The court also said the tax authorities will return within two months the Rs.2,500 crore that Vodafone had deposited with the authorities in pursuance to an interim order. The bank guarantee of Rs.8,500 crore will also be returned to the company, it ruled.

"This settles a prolonged litigation that had created a lot of uncertainty for foreign companies having similar structures who had entered into or were proposing to enter into similar transactions," said Sandeep Ladda, executive director with PricewaterhouseCooper (PWC) India.

"This should provide much needed respite to other litigants in other cases where the Vodafone controversy had been initiated by the revenue authorities and is currently pending at various stages of litigation across the country," he added.

Among other deals under the IT department's scanner are global telecom firm AT&T's stake sale in Idea Cellular to Tata. The Tatas later exited Idea, but the tax liability issue is still pending before the Bombay High Court.

Another one is GE's sale of majority stake in one of India's biggest outsourcing firm Genpact. The $500 million transaction for 60 percent stake bought by US-based private equity companies, General Atlantic and Oak Hill Partners, was completed overseas.

"This landmark decision will enhance the trust of international investors in the Indian judicial system and the strong institutional fundamentals underlying the economy," said FICCI secretary general Rajiv Kumar.

"Stability of institutional processes is an important requirement for attracting foreign direct investment. This decision will re-inject confidence in cross-border mergers and acquisitions and further augment such investment coming to India."

"We are pleased with today's judgment in the Supreme Court," Vodafone Group's chief executive Vittorio Colao said in a statement, on the verdict that will save a whopping $2.2 billion (Rs.11,000 crore) to his company.

"We are a committed long-term investor in India and we have made clear all along that we have faith in the Indian judicial system. We welcome the Supreme Court's decision, which underpins our confidence in India."

Predictably, the shares of Vodafone, the second-biggest stock by weight on the FTSE 100 of London Stock Exchange, climbed 1.4 percent to 177 pence after the court ruling.

During the course of arguments, Vodafone contended that the transaction to acquire stake in the Indian company did not attract the jurisdiction of the Indian tax authorities as Vodafone PLC was based in the Netherlands and Hutchison was based in Hong Kong.

The court agreed in the majority judgment.

"Applying the look at test in order to ascertain the true nature and character of the transaction, we hold that the offshore transaction herein is a bonafide structured foreign direct investment into India which fell outside India's territorial tax jurisdiction, hence not taxable," said Justice Kapadia and Justice Swatanter Kumar.

"The said offshore transaction evidences participative investment and not a sham or tax avoidant pre-ordained transaction. The said offshore transaction was between Hutchinson, a Cayman Islands company, and Vodafone, a company incorporated in the Netherlands," the two judges said.

"Consequently, the Indian tax authority had no territorial tax jurisdiction to tax the said offshore transaction."

Justice K.S. Radhakrishnan, the third member of the bench, also ruled in Vodafone's favour, albeit for a different reason.