Vodafone Group Plc has won an arbitration case against India’s tax demand stemming from a retrospective change in the nation’s tax law.
Vodafone International Holdings BV had initiated the proceedings in 2014, claiming that the tax liability imposed on it via retrospective amendments to the income tax law violated the principles of equitable and fair treatment under the India-Netherlands Bilateral Investment Treaty.
In an order passed on Friday, the Permanent Court of Arbitration in the Netherlands found merit in the telecom operator’s arguments and directed the Indian government to cease the tax demand, interest and penalty against the company. Any failure to comply with these directions will engage the government’s international responsibility, the Permanent Court of Arbitration held.
The respondent’s [Government of India] conduct in respect of the imposition on the claimant [Vodafone International Holdings BV] 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 [India-Netherlands BIT], as is the imposition of interest on the sums in questions and the imposition of penalties for non-payment of the sums in questions.Award by Permanent Court of Arbitration
The court also directed the government to reimburse 60% of Vodafone’s legal costs and 50% of the fees paid by the company to the appointing authority.
“Vodafone has finally got justice. Hopefully, this award brings an end to all litigation around the issue,” a spokesperson for law firm DMD Advocates told BloombergQuint. Vodafone was represented by senior counsel Harish Salve, Toby Landau QC and DMD Advocates.
This was a unanimous decision, pointed a Vodafone Group statement, adding that India’s appointed arbitrator Rodrigo Oreamuno also ruled in favour. “The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations.”
In a statement after the ruling, the central government said that it will study the award and “consider all options and take a decision on further course of action including legal remedies before appropriate fora”.
The Indian government could now either appeal the latest ruling in the Singapore High Court, or tweak the tax law to make it prospective and not retrospective, DMD Advocates’ Anuradha Dutt told Bloomberg News. “These are the two choices that come to my mind.”
If it chooses not to appeal the decision, then the government would have to pay Vodafone nearly Rs 85 crore—Rs 45 crore in taxes and Rs 40 crore in costs, said a government official on the condition of anonymity.
What’s The Case About?
The case relates to Vodafone’s 2007 purchase of Indian company Hutch Essar Ltd.
Vodafone International Holdings BV had acquired the entire share capital of CGP Investments (Holdings) Ltd. located in Cayman Islands. As a result of this offshore transaction, Vodafone effectively acquired a 67% interest in Hutch Essar from Hutchison Telecommunication International Ltd.
The revenue department sought to tax this as despite it being an offshore transaction between two non-resident companies 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 contested this demand, and in 2012 won against the tax department before the Supreme Court of India. The apex court held that sale of shares in question to Vodafone did not amount to transfer of a capital asset as per the provisions under the Income Tax Act.
Soon after, Parliament passed the Finance Act 2012, approving insertion of two explanations to Section 9 of the tax law. The government positioned these as clarifications saying 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.
Vodafone Idea Ltd. ended 12% higher on the National Stock Exchange though the decision will have no material impact on the India subsidiary.
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