India's top court on Friday rejected a $2.5 billion tax bill slapped on British phone giant Vodafone over its purchase of a local mobile operator in a ruling seen as a boost to foreign investment.
Indian authorities imposed the ê2.5 billion tax bill and sought an equal sum in penalties over Vodafone's $11.1 billion purchase in 2007 of a majority stake in the Indian mobile unit of Hong Kong's Hutchison Whampoa.
But the Supreme Court ruled that "Indian tax authorities had no jurisdiction to tax Vodafone" as it was an overseas transaction.
Vodafone's clear-cut win in the bitter legal battle was seen as delivering a shot-in-the-arm to India's battered reputation among foreign investors who have been rattled by the country's uncertain regulatory climate.
Vodafone chief executive Vittorio Colao welcomed the judgment, saying it "underpins our confidence in India" and "faith in the Indian judicial system".
Vodafone shares jumped 1.69 percent to 177.45 pence on the London Stock Exchange, bucking a falling market, following the ruling.
Indian tax officials contended Vodafone should have withheld the amount the vendor was due to pay in capital gains tax when it bought the stake.
However, Vodafone, the world's largest mobile operator by subscribers, argued it was exempt because the deal took place in the Cayman Islands and both buyer and seller were foreign.
Vodafone also noted it was the purchaser and made no gain on the deal.
In the ruling, Supreme Court Justice Radhakrishnan Nair compared the Indian tax demand to "capital punishment on capital investment".
A lawyer for Vodafone, Abhishek Manu Singhvi, expressed delight over the victory which saw the Supreme Court order the tax department to return Vodafone's half-billion-dollar tax deposit "with interest".
"Here is a very clear, thumping, unequivocal unambiguous verdict in favour of certainty, clarity -- and in favour of foreign investment," Singhvi said.
The legal battle had been closely tracked by international investors with experts saying the outcome could have implications for big-ticket purchases of Indian firms by other foreign companies.
"This landmark decision... will reinject confidence in cross-border mergers and acquisitions," said Rajiv Kumar, secretary general of Indian business chamber FICCI.
Foreign direct investment in India slumped by 20 percent last year amid concern over rampant corruption, bureaucratic delays, lack of progress on economic reforms and an uncertain regulatory climate.
"This was a litmus test won by foreign investors against an attempt by the Indian taxman to extend its jurisdictional reach," said Bundeep Singh Rangar, chairman of IndusView, an India-focused advisory firm based in London.
"It provides tax certainty to foreign investors as the verdict is a clear statement that deals done outside India that involve Indian assets, are not taxable in India."
Vodafone's purchase of Hutchison Essar, now renamed Vodafone India, was intended as a move to expand revenues in the face of saturated cellular markets in Western Europe.
But despite securing 147 million subscribers, or 17 percent of the Indian market, it has faced a rough ride.
Two years ago, it took a writedown of ê3.4 billion, reflecting a disappointing performance in a cut-throat sector where competition has forced call rates down to below a cent a minute.
Colao said Vodafone was committed to "grow our Indian business".
The ruling comes as Vodafone is reported planning to list its India operations to give it better "local roots".