Vodafone wins long battle against India over Rs 20,000 cr retro tax demand

The Permanent Court of Arbitration in Hague has ruled in favour of Vodafone group in its long-pending case against the Income Tax Department’s demand of Rs 20,000 crore for acquiring Hutchison Whampoa’s stake in then Hutchison-Essar in 2007 through an overseas deal.

“The Respondent’s (India’s) conduct in respect of the imposition on the claimant (Vodafone) of an asserted liability to tax notwithstanding the Supreme Court judgement is in breach of the guarantee of fair and equitable treatment laid down in Article 4(1) of the agreement (for promotion and protection of investments), as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question,” said the order by the panel, accessed by Business Standard.

The order further said Vodafone is entitled to fair and equitable treatment in respect of its investments in mobile telecommunication in India in line with BIT. Any failure to comply with this by India will engage with its international responsibility, it said.

The panel also asked India to pay £4,327,294.50 as 60 per cent of the cost that Vodafone bore for legal representation and €3,000 as 50 per cent fee paid by the company to the appointing authority.

The income tax department had raised the demand of Rs 7,990 crore in capital gains taxes in 2007 which rose to Rs 22,100 crore after including interest and penalty by 2016.

Vodafone said in a statement, “Vodafone confirms that the investment treaty tribunal found in Vodafone’s favour. This was a unanimous decision, including India’s appointed arbitrator Mr Rodrigo Oreamuno. The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations.”

The finance ministry said in a statement that the government will be studying the award and all its aspects carefully in consultation with its counsel. After such consultations, the government will consider all options and take a decision on further course of action including legal remedies before appropriate forums.

A senior government official, however, said, “The government is reviewing the tribunal order and will soon take a view. Implementation of foreign tribunal award decisions is governed by Indian Arbitration Act, where the government is not obliged to accept the award.”

He further explained that tax-related disputes are not within the ambit of the India- Netherlands BIPA. And this ruling of tribunal is under India-UK bilateral investment treaty (BIT).

The government had contested this and said that it should be under tax treaty with the foreign jurisdiction.

In that case, Vodafone may have to file the petition again in the high court under the tax treaty, the official said.

Vodafone has not paid a single penny to the tax department so no point of refund arising. But the write off is also ruled out and tax demand raised against the telecom major will remain, the official added. Together with the cost imposed on India by arbitration, this will be around Rs 85 crore only, he said.

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Sources said the government may have to refund Rs 45 crore only if it does not go for appeal against the Award.

Anuradha Dutt, founder and senior partner at DMD Advocates, who represented Vodafone in arbitration, said,”Vodafone has finally got justice first from Indian Supreme Court and now from an international arbitral tribunal.”

Central Board of Direct Taxes former member Akhilesh Ranjan said “The decision raises serious questions on whether the Government can accept the ruling and not enforce a tax demand raised under a law passed by Parliament. Of course, the Government might seek a review of the ruling, but ultimately may have to decide whether and how to implement it. This issue of implementation may continue to be contested in Indian courts under the Indian Arbitration Act.”

Though the Supreme Court passed the judgement in favour of Vodafone in 2012, saying that the income tax department had “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India, the then UPA government passed an amendment to the Income Tax Act with retrospective effect to bring the Vodafone-Hutchison kind of deals that are done overseas for Indian assets under the tax net.

Vodafone had deposited Rs 2,500 crore to the Supreme Court and given a bank guarantee of Rs 8,500 crore in 2012. The deposit was refunded and bank guarantee discharged after the Supreme Court win.

Vodafone challenged the tax demand at international arbitration under the India-Netherlands bilateral investment treaty (BIT) in 2014.

Later, India changed the model BIT by taking tax disputes out of it. Amit Maheshwari, tax partner at AKM Global said,” The new model BITs have found few takers. Going forward, this decision will not result in more companies opting for this approach as most BITs have already been terminated by India.”

Rakesh Nangia, chairman of Nangia Andersen India said Vodafone has successfully relied on the fair and equitable treatment standard in BIT to win the international arbitration against India.

Rajesh Simhan, leader and head of the tax practice at Nishith Desai Associates said the arbitration order effectively means closure of tax demands on Vodafone. ” I don’t foresee any further challenge to the award by Indian government.”

Timeline

2007: Vodafone buys Hutchison’s India assets for $11 billion in overseas deal. It soon gets a notice from the tax department on why it had not deducted tax at source.

The Bombay High Court rules that the I-T department has jurisdiction over a part of the transaction. Vodafone moves the Supreme Court.

ALSO READ: Rs 20,000 cr tax dispute: Vodafone wins arbitration case against India

2012: The Supreme Court rules in favour of Vodafone. Says the I-T department can’t levy tax on the deal.

The government brings in retrospective amendments to Income Tax laws, empowering itself to tax overseas deal if Indian assets are above a threshold

Vodafone issues a notice to the Indian government, initiating arbitration proceedings for failure to protect investor rights. The company invokes the bilateral trade treaty between India and the Netherlands for this purpose.

2016: Vodafone served a notice tax demand of Rs 22,100 crore, including interest since the date of the original demand, along with a threat to confiscate Indian assets if the tax is not paid.

A tribunal headed by Sir Franklin Berman at international arbitration constituted

2017: Vodafone issues second arbitration notice to India, this time under India-UK BIT

Govt approaches Delhi high court asking for restraining Vodafone to initiate parallel arbitration proceedings.

2018: The Delhi HC dismisses the plea of the government

2020: Award