The Financial Times (FT) reports today that Vodafone will appeal against the Mumbai High Court’s decision yesterday to dismiss the operator’s challenge over a tax bill relating to the US$11.1 billion purchase of Hutchison Essar in 2007. Vodafone had challenged whether Indian tax authorities had the right to assess the US$2 billion tax bill associated with its 67 percent acquisition stake in the Indian operator. India’s tax department initially argued that even though Vodafone was the buyer and Hutchison was the seller, the UK-headquartered group should have withheld an estimated US$2 billion of capital gains tax on the deal on the government’s behalf. The FT notes that Vodafone countered by saying the sale of shares took place between foreign companies, which under past practice would normally have exempted the transaction from taxation in India. Under the Hutchison Essar sale, a Dutch company controlled by Vodafone paid the US$11 billion to a Cayman Island entity run by Hutchison, for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator.

The FT states that Vodafone will appeal against the ruling to the Supreme Court in New Delhi, the country’s highest court, using an eight-week extension of an order temporarily preventing the tax department from taking any action. “Vodafone, based on advice received, continues to believe that the transaction is not subject to tax in India and is confident of a positive outcome ultimately,” the operator said. Industry observers believe the case could set a precedent. “The decision is very significant,” Mukesh Butani, partner and head of taxes at consultancy BMR & Associates, told the FT. “The bottom line is that if they’ve lost the case, there will be an impact on several other offshore transactions that the central government wants to tax.”