Vodafone Wins Arbitration Against India In Retrospective Tax Case

Vodafone Group Plc 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 London 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 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 from law firm DMD Advocates told BloombergQuint. Vodafone was represented by senior counsel Harish Salve, Toby Landau QC and DMD Advocates.

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 an offshore transaction between two non-resident companies and asked the Netherlands-based holding company of Vodafone to pay capital gains tax worth around Rs 12,000 crore.

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 share 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 the arbitration proceedings against the government.