Vodafone wins international arbitration against India in Rs 20,000 crore tax dispute case

Govt estimates Rs 75 crore liability -- Rs 30 crore in cost and another Rs 45 crore in tax refund

British telecom giant Vodafone Group plc on Friday won an arbitration against the Indian government over a demand for Rs 22,100 crore in taxes using retrospective legislation.

An international arbitration tribunal ruled that India's demand in past taxes was in breach of fair treatment under a bilateral investment protection pact.

"Vodafone confirms that the investment treaty tribunal found in Vodafone's favour," the British firm said in a statement. "This was a unanimous decision, including India's appointed arbitrator 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."

It was not immediately known if the Indian government will abide by the arbitration award.

The Government of India's liability will be restricted to about Rs 75 crore in cost refund, sources with direct knowledge of the matter said.

As per the award, the government has to reimburse Vodafone 60 per cent of its legal costs and half of the 6,000 Euros cost borne by Vodafone for appointing an arbitrator on the panel.

Vodafone had before the arbitration tribunal challenged India's usage of a 2012 legislation that gave it powers to retrospectively tax deals like Vodafone's USD 11 billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007.

It challenged the 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).

Sources said the tax demand was on the UK-listed company and Vodafone's India venture faced no liability.

Vodafone merged its India operations with billionaire Kumar Mangalam Birla's conglomerate but the combined entity Vodafone Idea Ltd is facing a USD 7.8 billion bill in past statutory dues.

Tax authorities had in September 2007 served notice to Vodafone International Holdings BV (VIHBV) for its alleged failure to deduct withholding tax from consideration paid to the Hutchison Telecommunications International Ltd.

Vodafone challenged this in the Supreme Court, which in January 2012 set it aside, saying the transaction was not taxable in India and so the company had no obligation to withhold tax.

In May that year, Parliament passed the Finance Act 2012 that amended various provisions of the Income Tax Act 1961 with retrospective effect to tax any gain on transfer of shares in a non-Indian company which derives substantial value from underlying Indian assets.

The company was in January 2013 served a tax notice of Rs 14,200 crore after including interest on the principal amount. A year later, Vodafone challenged the tax demand under the Dutch BIT.

Sources said the company in April 2014 served the notice of arbitration after out-of-court dispute resolution talks failed.

The tax department in February 2016 served a demand notice of Rs 22,100 crore, including interest accruing since the date of the original demand.

Vodafone has always maintained that there is no liability and that it will "continue to defend vigorously any allegation that VIHBV or Vodafone India Ltd is liable to pay tax in connection with the transaction with Hutchison and will continue to exercise all rights to seek redress".

Besides Vodafone, the Indian government also used the retrospective tax legislation to seek Rs 10,247 crore from British oil explorer Cairn Energy Plc over a 2006 reorganisation of its Indian businesses.

Commenting on the judgment, Kumarmanglam Vijay of J Sagar Associates said, "Vodafone's win in the arbitration against the government in the retrospective taxation of indirect transfers is very significant as it may cause other similarly placed companies to seek arbitral reliefs."

"While many bilateral investment treaties have been scrapped by government or modified not to cover taxation within their ambit, this space is likely to witness further action," he said.

Nigam Nuggehalli, Dean - School of Law at BML Munjal University, said the tax chickens of 2012 have come home to roost.

"Whatever might have been the merits of its position on Vodafone's tax planning, the Indian government was blatantly unfair in retrospectively amending the income tax legislation to uproot the Indian Supreme Court's decision upholding Vodafone's position in its tax dispute with India.

"The retrospective amendment that overturned the decision of the highest court of the land was badly drafted in its wide generalities and carried a perverse sense of vindictiveness," he said.

The arbitration victory, he said, is a setback for the Indian government, the ramifications of which might be even worse as there are a number of other pending arbitrations on the same set of issues. "Hopefully, the Indian government will learn from this arbitration that an attractive investment climate requires that they respect the rule of law rather than undermine it."

Soman Chandwari of KS Legal & Associates said the recent Supreme Court judgment providing a 10-year repayment period for debt-ridden telecom companies brought some respite for Vodafone-Idea.

"It would be interesting to observe the implications of this decision on other international arbitration cases over retrospective tax claims and cancellation of contracts against companies like Cairn Energy and a dozen others if others were to follow suit," she added.