Last month, an international arbitration court ruled that the Indian government seeking ₹Rs 22.1 billion in taxes from telecom giant Vodafone using retrospective legislation “violated the guarantee of fair and equitable treatment” guaranteed by the bilateral investment protection pact between India and the Netherlands.
Finance Ministry sources said the government will decide to challenge the award in court in Singapore, which was the seat of the arbitration, after taking a legal opinion.
While the cost implication in the case is limited to having to pay ₹85 million rupees for Vodafone in legal costs, what weighs on the government’s mind is a separate arbitration involving Britain’s Cairn Energy plc.
If an independent arbitration panel had a claim for ₹Rs 10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn up to USD 1.5 billion ( ₹11,000 crore).
This is the amount equivalent to the value of the Cairn shares that the government had sold to recover a portion of the tax claim. It also includes seized dividends and tax refunds.
Sources said Vodafone International Holding (a Dutch company) bought 100 percent of the shares of the Cayman Islands-based company CGP Investments for $ 11.1 billion in February 2007 to indirectly gain 67 percent control of Hutchison. Essar Ltd, an Indian company.
The Tax Department deemed the deal designed to avoid capital gains tax in India and thus imposed a tax lawsuit, which was rejected by the Supreme Court in 2012.
To stop the abuse and plug the loophole in such indirect transfer of Indian assets, the government in 2012 amended the law to make such transfers taxable in India, they said, adding that Vodafone received a new lawsuit that the company challenged through international arbitration.
The tax lawsuit on Cairn Energy, they said, is different when it comes to the alleged capital gains the company made by transferring Indian assets to a new company and listing it on the exchanges.
Dheeraj Nair, a partner at J Sagar Associates, said the government “should challenge the (Vodafone) award as this award will have persuasive value in other treaty arbitrations that refer to retrospective tax measures.”
“Any party that is not satisfied with the award has the right to challenge it, therefore, such challenge is justified,” he said.
Sonam Chandwani, Managing Partner at KS Legal & Associates, however, said that “since the Permanent Court of Arbitration in The Hague approved the award in favor of Vodafone, there is no further authority to appeal.”
“The government can only go back to the Permanent Court of Arbitration at some technical point, but that will do no good,” he said.
Since India’s Arbitration Law obliges the government to implement an award from a foreign court, Vodafone can request the same in case the award is challenged in Indian courts, he said.
“However, in the current scenario, since all the property, both tangible and intangible, of Vodafone is located outside of India, it will be difficult for the government to acquire it,” he said.
She said that in the case of Cairn Energy, India to obtain the retroactive taxes has already expropriated all its investment.
“In circumstances such as when the Permanent Court of Arbitration issues a decree in Cairn’s favor, the government of India still has the option of obtaining the desired retroactive taxes for reasons such that the taxes are not covered by any bilateral investment protection treaties. and, as such, it cannot be submitted to arbitration. It is challenging the jurisdiction of said panels to rule on a tax matter, “he said.
Nair said the government certainly has the option not to appeal in Vodafone, but to do so in the Cairn case, as each case is independent and subject to a different treaty, which grants different protections.
Cairn’s claim is under the India-UK treaty, while Vodafone’s claim was under the India-Netherlands treaty.
While Nair said there would be no further negative impact on investor sentiment as they acknowledge that challenge procedures are part of the norm, Chandwani said that appealing against an international arbitration award will discourage investors.
“Any investor will begin to contemplate the possibility of investing in those countries when any dispute arises, the government of those countries could not comply with the international order, putting investors at losses. This creates an obstacle in the ease of doing business in such countries. countries and therefore discourages them from making any investment to enjoy any form of financing, “he said. PTI ANZ MKJ
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