Updated: September 26, 2020 7:28:14 am
Pedestrians pass a Vodafone India Ltd. store in Mumbai. (Bloomberg photo: Dhiraj Singh)
In a unanimous decision, the Permanent Court of Arbitration in The Hague ruled on Friday that India’s retrospective claim for Rs 22,100 crore as capital gains and withholding tax imposed on the British telecommunications company for a 2007 settlement was “a violation of the guarantee of justice and equitable treatment ”. The court has also asked India do not pursue the tax lawsuit more against Vodafone Group.
What is the case
In May 2007, Vodafone had purchased a 67% stake in Hutchison Whampoa for $ 11 billion. This included Hutchison’s mobile phone business and other assets in India. In September of that year, the Indian government first raised a claim for Rs 7,990 crore in capital gains and tax withholding from Vodafone, saying that the company should have deducted the tax at source before making a payment to Hutchison.
Vodafone challenged the notice of claim in the Bombay High Court, which ruled in favor of the Income Tax Department. Vodafone subsequently challenged the Superior Court ruling in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the 1961 Income Tax Act was correct and that it did not have to pay any tax on the purchase of the share. .
The same year, the then Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court ruling by proposing an amendment to the Finance Law, giving the Income Tax Department the power to retroactively tax such deals. . The law was passed by Parliament that year and the responsibility for paying the taxes fell on Vodafone. By then, the case had become infamous as the “retrospective tax case.”
The ruling in favor of Vodafone signals a setback for the country’s retrospective fiscal policies. It also raises the possibility that other cases submitted to arbitration may be resolved in a similar manner.
Nick Read, CEO of Vodafone Group, in front of the Indian Parliament in March this year. (Express Photo: Amit Mehra)
What is retroactive taxation?
As its name suggests, retrospective taxation allows a country to pass a rule on the imposition of taxes on certain products, items or services and offers and to charge companies from a time after the date the law was passed.
Countries use this route to correct any anomalies in their tax policies that, in the past, have allowed companies to take advantage of such loopholes. While governments often use a retrospective amendment to tax laws to “clarify” existing laws, it ends up hurting companies that knowingly or unknowingly interpreted the tax rules differently.
In addition to India, many countries, including the US, the UK, the Netherlands, Canada, Belgium, Australia, and Italy, have retroactively taxed companies that had benefited from loopholes in the previous law.
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What happened after India passed the retrospective tax law?
Once Parliament passed the amendment to the Finance Law in 2012, the responsibility for paying the taxes fell on Vodafone. The amendment was criticized by investors around the world, who said the change in the law was “perverse” in nature.
“The retrospective amendment that overturned the decision of the country’s highest court was poorly worded in its broad generalities and carried a perverse sense of revenge,” said Nigam Nuggehalli, Dean of the BML Munjal University School of Law.
Following international criticism, India tried to settle the matter amicably with Vodafone, but was unable to do so. After the new NDA government came to power, it said it would not create new tax obligations for companies that use the retrospective tax route.
By 2014, all attempts by the telecommunications company and the Ministry of Finance to solve the problem had failed. The Vodafone Group then invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995.
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A customer leaves a Vodafone Idea Ltd. store in Mumbai on Sunday, January 19, 2020. (Photo / Bloomberg File)
What is the Bilateral Investment Treaty?
On November 6, 1995, India and the Netherlands signed a BIT for the promotion and protection of investment by companies from each country in the jurisdiction of the other.
Among the various agreements, the treaty had established that both countries would strive to “encourage and promote favorable conditions for investors” from the other country. The two countries, by virtue of the BIT, would guarantee that companies present in each other’s jurisdictions “receive fair and equitable treatment at all times and enjoy full protection and security in each other’s territory.”
While the treaty was between India and the Netherlands, Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, had purchased the Indian business operations of Hutchinson Telecommunicaton International Ltd. This made it a transaction between a Dutch firm and an Indian firm.
The India-Netherlands BIT expired on September 22, 2016.
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What did the Permanent Court of Arbitration in The Hague say?
One of the main factors why the Court of Arbitration ruled in favor of Vodafone was the violation of the BIT and the United Nations Commission for International Trade Law (UNCITRAL).
In 2014, when the Vodafone Group initiated an arbitration against India in the Arbitral Tribunal, it did so in accordance with Article 9 of the India-Netherlands BIT.
Article 9 of the BIT says that any dispute between “an investor of a contracting party and the other contracting party in relation to an investment in the territory of the other contracting party” will be resolved, to the extent possible, amicably through talks.
The other is Article 3 of the UNCITRAL arbitration rules, which, among other things, says that “the constitution of the arbitral tribunal will not be hindered by any controversy regarding the adequacy of the arbitration notice, which will be finally resolved by the arbitral tribunal ”.
In its ruling, the arbitration court also said that now that India has been found to have violated the terms of the agreement, it must now stop efforts to recover such taxes from Vodafone.
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