UPDATE: Vodafone CEO: Convinced No Tax Is Due In India

(Adds more comments, background) By R. Jai Krishna and Arpan Mukherjee Of DOW JONES NEWSWIRES NEW DELHI (Dow Jones)--U.K.-based Vodafone Group PLC's (VOD.LN) chief executive said the mobile giant is confident it doesn't have any taxes due in India in relation to its $11.2 billion acquisition of a majority stake in local mobile phone operator Hutchison Essar Ltd. in 2007. "We have confidence in the court process. India has a very solid legal system and we will just go on and on until our reasons are heard," Vittorio Colao told reporters Thursday. Following the acquisition of a 67% stake in Hutchison Essar, which has since been renamed Vodafone Essar Ltd., Indian authorities slapped Vodafone International Holdings BV--the Netherlands-based unit of Vodafone that carried out the purchase--with a tax bill. The Indian authorities said Vodafone should have withheld tax on the government's behalf and that Vodafone is liable to pay tax that could total as much as $2.6 billion as the deal involved the transfer of an Indian asset. Vodafone International filed a high court appeal against the claim, saying it wasn't liable as it bought the stake from CPG Ltd. in a deal that took place on foreign soil since CPG is registered in the Cayman Islands and owned by Hutchison Telecommunications International Ltd. Hutchison Telecommunications owned the stake in Hutchison Essar. A Bombay High Court judge is expected on Aug. 2 to hear arguments from the two sides over the question of jurisdiction. The court's decision could have far-reaching implications on how foreign companies view India as an investment destination. Some experts say a ruling against Vodafone could discourage multinational companies from pursuing big-ticket deals in India. Vodafone isn't alone in such disputes in the fast-growing economy. Another U.K. company, SABMiller PLC, is embroiled in its own tax dispute with India over its 2006 acquisition of Foster's Indian beer business. Although it was a transaction between overseas entities, India said the Foster's India brand and other assets were being transferred and thus claimed jurisdiction to tax the deal. Representatives of brewer SABMiller and Foster's weren't immediately reached for comment. India is a growing burden for Vodafone. The company has 109 million of the nation's 635 million wireless subscribers and although customer growth has been strong, a wave of new competitors entering India's telecom sector over the past few years has prompted price cuts, slicing into the bigger players' profit margins. Vodafone in May took a $3.4 billion impairment charge on the 2007 deal and recently paid $2.8 billion to the federal government for radio spectrum intended for wireless Internet services. The payouts so far this year are on top of the roughly $2 billion Vodafone pays each year as license fees to the Indian government. Taxes, falling margins and license payouts aren't the only problems Vodafone has in the fastest growing telecom market in the world, which is also the second-largest one globally. Unit Vodafone Essar, India's third-largest mobile phone operator by users, along with larger peer Bharti Airtel Ltd., in May opposed the recommendations of the country's telecom regulator on allocating second-generation bandwidth. The Telecom Regulatory Authority of India suggested that companies already operating in India should pay a one-time fee to keep excess spectrum. This fee, the regulator said, should be linked to the third-generation spectrum. The price of 3G has exceeded what the companies paid for their pan-India 2G bandwidth. The cost of a pan-India 3G spectrum touched about $3.59 billion, as opposed to just over $350 million for the 2G pan-India spectrum. "This market requires good rules, which allows investments to bring broadband, bring 3G everywhere...And that will require some very careful thinking about the rules and regulations," Colao told reporters. "The potential of the market is there," he said. Colao said Vodafone is already working on bringing in a "very" low cost device for the 3G services, in a bid to bring in a larger proportion of India's more than 1 billion strong population for the new services. But he didn't say by when it plans to launch 3G services in India. -By R. Jai Krishna, Arpan Mukherjee and Romit Guha, Dow Jones Newswires; +91-9967586928; romit.guha@dowjones.com (END) Dow Jones Newswires July 29, 2010 08:07 ET (12:07 GMT)