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September 25, 2020

Vodafone Group won Rs 20,000 crore tax arbitration against the Indian government in International Arbitration Tribunal

by facelesscompliance in Income Tax

Vodafone Group won Rs 20,000 crore tax arbitration against the Indian government in International Arbitration Tribunal

Telecom giant Vodafone Group Plc on 25th September, 2020 won a significant ruling against the Indian government in an international court over Rs 20,000 crore ($ 2 billion) in dues which it had described as unfair. Vodafone was represented at the Hague by DMD Advocates, seeking protection from the retro tax demand through arbitration under the India-Netherlands Bilateral Investment Protection Agreement.

What is the India-Netherlands Bilateral Investment Protection Agreement?

The Government of the Republic of India and the Government of the Kingdom of the Netherlands desiring to strengthen the traditional ties of friendship between their countries, to extend and intensify the economic relations between them particularly with respect to investments by the investors of one Contracting Party in the territory of the other Contracting Party entered into a Bilateral Investment Protection Agreement.

Recognising that reciprocal protection of such investments under an agreement will subserve the aforesaid objective and will be conducive to the stimulation of individual business initiative and will increase prosperity in both States.

This Agreement applied to any investment made by investors of either Contracting Party in the territory of the other Contracting Party including an indirect investment made through another company, wherever located, which is fully owned by such investors, whether made before or after the coming into force of the Agreement.

What is the International Arbitration Tribunal?

The international arbitration tribunal is the independent and non-governmental panel of independent and impartial experts most often composed of three members nominated by the Parties (or appointed by the international arbitration institution, or more rarely by a national court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award. All members of an international arbitration tribunal are required to be impartial and independent of the Parties to the dispute.

What judgement was passed in the Vodafone case?

  • The international arbitration tribunal in The Hague ruled that the Indian government’s imposition of a tax liability on Vodafone as well as interest and penalties was in breach of the investment treaty agreement between India and the Netherlands.
  • The Permanent Court of Arbitration ruled that the conduct of India’s tax department violated “fair and equitable” treatment.
  • The tribunal, in its ruling, said the government must cease seeking the dues from Vodafone and should also pay over Rs 40 crore to the company as partial compensation for its legal costs, the source said.

What was the case that led to this judgement?

  • The tax dispute involving Rs 12,000 crore in interest and Rs 7,900 crore in penalties stems from Vodafone’s acquisition of the Indian mobile assets from Hutchison Whampoa in 2007.
  • In 2007, Vodafone received notices from the India’s tax authorities alleging that the firm had failed to deduct withholding tax in the Hutchison deal.
  • The UPA government had said that the Hutchison-Vodafone deal was liable for tax deduction at source under the Income Tax Act.
  • While the Supreme Court subsequently quashed the demand in January 2012, the Government later that year amended the Income Tax Act retrospectively, putting the liability back on Vodafone Group.
  • The Government of India through the Finance Act 2012 enacted a law to retrospectively tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as Vodafone International Holdings BV’s (VIHBV’s) transaction with Hutchison in 2007
  • In April 2014, Vodafone initiated arbitration proceedings against India.
  • Vodafone had invoked India-Netherlands bilateral investment treaty seeking resolution to the tax demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) imposed on it by enacting a tax law with retrospective effect to sidestep a Supreme Court judgement that went in the company’s favour.
  • Vodafone had moved the International Court of Justice (ICJ) in 2016 due to a lack of consensus between the parties’ arbitrators in finalising a judge for the tax dispute.
  • Afterward, a tribunal headed by Sir Franklin Berman was set up in June 2016 after Vodafone challenged India’s use of a 2012 legislation giving it powers to retrospectively tax deals like Vodafone’s $11 billion acquisition of a 67% stake in the mobile phone business owned by Hutchison Whampoa in 2007.
  • It was submitted that this tax was enacted by India with retrospective effect and sidestepped a Supreme Court judgement that went in the company’s favour.
  • The telco challenged India’s demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT).

Spurred by the news, on Friday Vodafone Idea’s scrip on BSE closed 12% higher at Rs 10.20. India is entangled in more than a dozen international arbitration cases against companies, including Cairn Energy, over retrospective tax claims and cancellation of contracts. The exchequer could end up paying billions of dollars in damages if it loses.

Government to study the arbitration case award in Vodafone International Holding BV

The Finance Ministry has said today that it has just been informed that the award in the arbitration case invoked by Vodafone International Holding BV against Government of India has been passed.  The Government will be studying the award and all its aspects carefully in consultation with our counsels. After such consultations, the Government will consider all options and take a decision on further course of action including legal remedies before appropriate fora.

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