International arbitration: Vodafone wins Rs 22,000-crore retrospective case against tax department

Vodafone Group has won a long pending arbitration case against the Indian government relating to retrospective taxation under which the income tax department had raised a demand of around Rs 22,000 crore on the British telecom major. Ruling in favour of Vodafone Group, the Permanent Court of Arbitration in Hague stated that the Indian tax department’s conduct of imposing a tax liability along with interest and penalties was in breach of guarantee of fair and equitable treatment of the terms laid out in the bilateral investment treaty between the Netherlands and India.

Confirming the ruling in favour of the company, Vodafone Plc in a statement to FE said, “Vodafone confirms that the investment treaty tribunal found in Vodafone’s favour. 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.”

According to the award, the government of India will reimburse Vodafone 4,327,294.50 pounds or its equivalent in US dollars, being 60% costs for legal representation and assistance, and 3,000 euros or its equivalent in US dollars, being 50% of the fees paid by Vodafone to the appointing authority.

It remains to be seen whether the government challenges the award in the high court as in the past it has maintained that matters relating to taxation is outside the ambit of bilateral investment treaties. A statement by the finance ministry in the evening said, “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.”

The ruling, which came during market hours, saw the shares of Vodafone Idea rally and close up 13.60% at Rs 10.36 on the BSE even though the development has no direct relation with the Indian JV. Even prior to Vodafone’s Indian unit’s merger with Idea Cellular in August 2018, the case related to the parent British firm on which the tax demand was raised.

Anuradha Dutt, who represented Vodafone along with senior lawyer Harish Salve, said that Vodafone got justice twice – earlier from the Supreme Court and now from the international arbitral tribunal. “If I was an advisor to the Indian government, I would suggest that the government should now bring an amendment to make this prospective and the same will boost investor sentiment which is extremely critical for India today,” Dutt told FE.

Taxation expert and senior SC lawyer Tarun Gulati termed the development as positive. “Certainty in tax law is the fundamental basis on which companies make investments in India. Vodafone succeeded in the highest court of the land on interpretation and that was sought to be negated by making retrospective amendments. The award may be challenged in execution proceedings in India as being contrary to the public policy of India, but it is hoped that such challenges are dismissed and the doctrine of fairness is given primacy,” Gulati said.

Though Vodafone had initiated international arbitration way back in 2014 – after an out-of-court settlement with the Indian government broke down – under the India-Netherlands bilateral treaty agreement, the company subsequently moved to arbitration court in Hague as the government of India and Vodafone could not agree on the appointment of the third arbitrator – both the sides had appointed their arbitrator and needed to appoint a third arbitrator jointly who’s supposed to be a neutral party.

Vodafone had challenged the tax department’s demand of Rs 7,990 crore in capital gains taxes, which went up to Rs 22,100 crore after including interest and penalty.

The government had initiated a conciliation process with the company in 2013 but dropped it once Vodafone had invoked arbitration under the BIT. The government’s stand had been that tax matters are not under the purview of BIT.

The tax department had in February 2016 served a demand notice of Rs 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 it is liable to pay tax in connection with the transaction with Hutchison and will continue to exercise all rights to seek redress.

In 2012, the government had lost the Vodafone tax case related to its $11-billion acquisition of 67% stake in the Indian mobile-phone business owned by Hutchison Whampoa in 2007 in the Supreme Court.

It subsequently brought in the controversial retrospective amendment which overturned the SC judgment.