The Permanent Court of Arbitration (PCA) at The Hague has ruled in the favour of the Vodafone Group in its decade-long battle against the Indian income tax department’s tax liability demand for Rs 22,100 crore that brings us to the transaction in 2007. The case begins with Hutchison Telecommunications International Limited (HTIL), a mammoth telecommunication service provider in countries like Indonesia, Sri Lanka and India, based in Cayman Island. CGP Investments (Holdings) Ltd, a subsidiary of HTIL,owned 67 % stake in Hutchison Essar Limited which is an amalgamation of Hutch and Essar. One day, HTIL decided to sell the Indian shares and say goodbye to India. In its search, HTIL found Dutch-based   Vodafone International Holdings and insofar Vodafone agreed to pay $11.1 billion to HTIL, Hutch Essar became Vodafone Essar.

In September 2007, the Indian tax authorities termed the structure of this  multi-billion dollar transaction as a tax avoidance scheme and slapped a demand notice on Vodafone seeking capital gains tax of $2.1 billion on  the sale of Indian assets and the profits earned in India. But this wasn’t approbated to Vodafone as the transaction took place between  CGP Investments and Vodafone International Holdings. Is this legit to tax a transaction between two foreign companies?

Indian tax authorities and Vodafone dissent over this fact. The latter approached the Bombay High Court, presided then by Justice D.Y. Chandrachud, which ruled in favour of the IT department. Vodafone was miffed and proceeded to challenge the High Court judgment in the Supreme Court, in 2012. The Supreme Court in 2012 set aside the high court judgment, considered the transaction a share sale rather than asset sale and ruled that Vodafone did not have to pay any taxes for the stake purchase as its understanding of the Income Tax Act of 1961 was veracious. The same year, then Finance Minister, the late Pranab Mukherji , thwarted the Supreme Court’s ruling by proposing an amendment to the Finance Act in March 2012: income arising from the sale of shares or units shall be deemed to accrue or arise in India even if the transaction had taken place outside India, and its value depended primarily on assets in India, thereby giving the Income Tax Department the power to retrospectively tax such deals.This means that the tax department has the authority to reassess transactions dating back to 1962. The Act was passed by Parliament and the setback fell over Vodafone which seemed to many as Tax Terroism. Globally, the investors considered the change in law to be “perverse in nature” and criticized the amendment. On account of the international criticism, India endeavoured to resolve the squabbles amicably with Vodafone,but failed. In 2014, the Vodafone Group initiated arbitration against India at the Permanent Court of Arbitration(PCA) at Hague, it had done so under Article 9 of the Bilateral Investment Treaties(BIT) between India and the Netherlands. Article 9 of the BIT says that “Any dispute related to the investment activity arising between the countries under the contractual agreement will be resolved cordially through negotiations.”

On 25th September 2020, the PCA ruled in favour of Vodafone arguing that India is guilty of breaching the guarantee of fair and equitable treatment (FET) laid down in Article 4(1) of the agreement between Netherlands and India for the promotion and protection of investments (1995) and it must stop further efforts to recover the said taxes from the company.Does this mean Vodafone is no longer liable for any tax penalties?

 From the sources it is known that the government of India has been asked to pay compensation of about Rs. 40 crore rupees to Vodafone which is 60% of the tribunal’s administrative cost while the rest 40% of the cost would be borne by Vodafone and to refund the tax collected so far ( from Vodafone), which is about Rs. 45 crore.Therefore, the total onus would be around Rs. 85 crore only. India’s Finance Ministry said that “It would carefully study the award, together with its lawyers. After such consultations, the government will consider all options and take decisions on further course of action including legal remedies,”

 

Will India prima facie accept the obligations? Or will it fight back to proof itself infallible?

 

The options left with India now are either to appeal the decision in one of Singapore’s appeal courts or simply choose to not honour the verdict at all. After all, India has always contested that a tax demand such as this cannot be dodged by a foreign court i.e. if the legislators pass any law, then all entities within the state are bound to honour it. Foreign courts have little jurisdiction here. The only pitfall is that if the government disregards the ruling entirely it will lead to violation of India’s international law obligations. Hence, India’s reputation of being an attractive  investment destination will be at stake.

 

Can we consider this controversial dispute to be the end of all the future arbitration claims? Not really. India is involved in dozens of such engagements like these including a 10,000 crores demand from Cairn Energy over retrospective tax claims and cancellation of contracts. If India fails to foist its claim on legal grounds, it would ostensibly end up paying billions of dollars in the damages. India has already ended such agreements with over 50 countries to reduce the arbitration claims.The country should rationalise the laws by offering reliefs to foreign investors and  restore the right to tax them. It is the Indian government’s responsibility to ensure that the foreign investors respect the rule of law and peace and harmony prevails in its relation with the foreign countries. It’s high time for India to bring transparency in its laws so that in future no investor gets obfuscated by the provisions stated in Income Tax laws.

This article has been written by Pranjal Ritolia studying B.Com. Honours from Shri Ram College of Commerce.

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