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Vodafone wins Rs 20,000 crore arbitration against India in retrospective tax case

The arbitration case dates back to Vodafone’s 2007 purchase of Indian company Hutch Essar Ltd in an offshore transaction between two non-resident companies.

Sep 28, 2020 17:25 IST
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Vodafone Group PLC has won a long-pending arbitration against India with the Permanent Court of Arbitration in Hague ruling that the Indian income tax authorities had violated provisions of the Bilateral Investment Treaty with the Netherlands by amending the law retrospectively to demand over Rs 20,000 crore in tax and penalties.

The Permanent Court of Arbitration in The Hague ruled that the tax demand was in breach of “equitable and fair treatment standard” provided for under the Bilateral Investment Protection Agreement (BIPA). The original tax demand was under Rs 8,000 crore, but it was increased to Rs 22,000 crore due to interest and penalty claimed by the tax department.

Vodafone confirmed that the investment treaty tribunal found the arbitration case to be in Vodafone’s favour. As per reports, the Indian Government reportedly has decided to challenge the enforcement of the arbitration award in Indian courts and it remains confident that Indian courts will deny the company's request to enforce the award

The Case

Vodafone International Holdings BV had initiated the arbitration proceedings in 2014, claiming that the tax liability imposed on it by India through retrospective amendments to the income tax law violated the principles of equitable and fair treatment under the India-Netherlands Bilateral Investment Treaty.

Permanent Court of Arbitration's ruling: Key Highlights

The Permanent Court of Arbitration in the Netherlands in its order, which was passed on September 25, 2020, found merit in the telecom operator’s arguments and directed the Indian government to withdraw the tax demand, interest and penalty against the company. 

The Permanent Court of Arbitration in Hague directed the Indian government to reimburse 60 percent of Vodafone’s legal costs and 50 percent of the fees paid by the company to the appointing authority.

The court had stated that the Indian Government's conduct in respect of the tax imposition on Vodafone is in breach of the guarantee of fair and equitable treatment, which is stated under Article 4(1) of the Agreement. The court further held that the Indian government's imposition of interest on the sums in questions and the imposition of penalties for non-payment of the sums in question was also a breach of the code. 

The tribunal held that any attempt by India to enforce the tax demand or any failure to comply with these directions would be a violation of India’s international law obligations.

The arbitration award to Vodafone was a unanimous decision. The Vodafone Group in a statement informed that India’s appointed arbitrator Rodrigo Oreamuno also ruled in favour.

Vodafone was represented in the case by senior counsel Harish Salve, Toby Landau QC and DMD Advocates.

What is India's response?

The Indian government stated that it will study the award and consider all options and make a decision on the further course of action including legal remedies before the appropriate forum. 

What options does Indian government have now?

The Indian government can now either appeal against the latest ruling in the Singapore High Court or amend the tax law to make it prospective and not retrospective. If India chooses not to appeal the decision, then the centre will have to pay Vodafone almost Rs 85 crore-Rs 45 crore in taxes and Rs 40 crore in costs, as per sources. 

Background

The arbitration case dates back to Vodafone’s 2007 purchase of Indian company Hutch Essar Ltd. The Vodafone International Holdings BV had acquired the entire share capital of CGP Investments (Holdings) Ltd. located in the Cayman Islands, as a result of this, it had effectively acquired a 67 percent interest in Hutch Essar from Hutchison Telecommunication International Ltd.

The purchase was conducted as an offshore transaction between two non-resident companies. Despite this, India's revenue department sought to tax the purchase as the underlying asset was India, and asked the Netherlands-based holding company of Vodafone to pay capital gains tax of around Rs 12,000 crore plus interest and penalty.

Vodafone Group, however, contested this demand and in 2012 it won the case against the tax department before the Supreme Court of India. The apex court had held then that the sale of shares in question to Vodafone did not amount to the transfer of a capital asset as per the provisions under the Income Tax Act.

The Parliament passed the Finance Act 2012 approving the insertion of two explanations to Section 9 of the tax law.

The Indian government used the insertions to clarify that income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from April 1, 1962.

Vodafone contested the tax liability arising out of this retrospective amendment and initiated arbitration proceedings against the government.

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