Vodafone Wins International Arbitration Against India Over Retrospective Tax Demand of ₹20,000 Crore
Indian government was also directed to pay Vodafone an excess of 4 million pounds. The amount is 60% of the company's costs for legal representation and assistance by the Permanent Court of Arbitration.
Background and brief facts of Vodafone retrospective tax dispute case
In 2007, Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar.
- To expand its footprint Vodafone decided to take the roundabout route.
- The company's subsidiary exchanged cash for shares with a similar holding company for Hutchison Essar. This transaction happened far off in the Cayman Islands.
- Since the deal was entirely offshore, the Indian tax authorities had no say in the matter.
- The government said Vodafone was liable to pay taxes on the acquisition, which the company contested.
- In 2012, Vodafone had first initiated arbitration against the government invoking the India-Netherlands Bilateral Investment Protection Agreement (BIPA). The Apex Court of India ruled in favour of Vodafone by saying it acted ‘within the four corners of law’.
- The Indian government saw over Rs 20,000 crore in unpaid taxes by Vodafone, a report by the Hindu pointed out in 2014.
- The government then came up with the General Anti-Avoidance Rule (GAAR). This rule basically said that the government could dig up past deals all the way back to 1962. GAAR was postponed to 2016.
- Despite winning the $2 billion tax case in the Supreme Court five years ago, Delhi HC picked the matter in 2017.
- Even though in 2012, the Supreme Court had held that the tax department had no jurisdiction to impose obligations on Vodafone for a transfer of shares of a foreign company between two non-residents, Parliament's retrospective amendments to the Income Tax Act rendered the 2012 Supreme Court judgment ineffective. Thus, Vodafone's tax liability, as well as penalties and interest on the same, were upheld.
- On August 22 Delhi HC restrained Vodafone Group’s arbitration proceedings under the India-UK BIPA. This was the company’s second arbitration on the same issue, as per a PTI report.
- The government challenged the second arbitration as well stating 'the two claims were based on the same cause of action and seek identical reliefs from two different tribunals constituted under two different investment treaties against the same host state'.
- However, Vodafone informed the Court that it would not submit to the jurisdiction of the Court regarding the Rs 11,000 crore tax demand.
- At the end of October 2017, HC allowed Vodafone Group representatives to participate in the process of appointing a presiding arbitrator in its international arbitration process against India in the tax dispute case. This is what has been challenged by the Centre on December 12, 2017.
Vodafone entitled to fair and equitable treatment under BIT
The Permanent Court of Arbitration (PCA) at The Hague ruled in favour of Vodafone on the question of Indian government's retrospective tax claim. PCA also held that Vodafone is entitled to fair and equitable treatment under the Bilateral Investment Treaty (BIT) signed between India and The Netherlands.
Key excerpts from the Vodafone judgement
"The Respondent's (Indian Government) conduct in respect of the imposition on the Claimant (Vodafone) of an asserted liability to tax notwithstanding the Supreme Court Judgment is in breach of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement, as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question."
While directing the Indian government to pay Vodafone, the Court stated, "The Respondent will reimburse to the Claimant the sum of £ 4,327,294.50 or its equivalent in US Dollars, being 60% of the Claimant’s costs for legal representation and assistance, and € 3,000 or it's equivalent in US dollars, being 50% of the fees paid by the claimant to the appointing authority."
Commenting on Vodafone's huge win Mr Kumarmanglam Vijay, Partner, J. Sagar Associates sees arbitration as a rescue mechanism for similarly placed companies.
“Vodafone's win in the arbitration against the government in the retrospective taxation of indirect transfers is very significant as it may cause other similarly placed companies to seek arbitral reliefs. While many bilateral investment treaties have been scrapped by Government or modified not to cover taxation within their ambit, this space is likely to witness further action”, adds Mr Vijay.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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