Any attempt by India to enforce tax demand would be violation of country's international law obligations: Vodafone

By Shailesh Yadav
New Delhi [India], September 25 : After it won a long-pending arbitration case against India's income tax (IT) department, Vodafone Group said that any attempt by India to enforce tax demand would be a violation of India's international law obligations.
"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," Vodafone Group said in a statement.
Meanwhile, the Ministry of Finance said that that there is no question of India losing Rs 20,000 crore in Vodafone tax case as reported in some sections of media.
Sources clarified that since Vodafone had not paid the tax demand of Rs. 7900 Crore and interest and penalty on it, the question of India losing Rs 20,000 crore does not arise. Also, the Tribunal has not accepted the claim of Vodafone for award of damages.
The Government shall be examining the order carefully and further appropriate action would be taken after obtaining legal opinion, including, inter alia, challenging the award by filing of an application before the appropriate court in Singapore, which is the seat of the arbitration, they added.
Finance Ministry sources acknowledged that the Arbitration Tribunal vide its order dated September 25, 2020, ruled in favour of Vodafone and held that the tax demand raised by the Indian Income Tax Department on the basis of the retrospective amendment is in violation India-Netherlands BIPA.
According to sources, the tribunal has directed India to bear 60 per cent of cost incurred by Vodafone towards legal representation and assistance, which comes to 43,27,294.50 pounds plus 50 per cent of the fees paid by Vodafone to the appointing authority, which comes to 3,000 Euros.
Thus, the total cost of reimbursement works out in Indian rupees to around Rs 40 crores. In addition, an amount of Rs 44.74 crores collected from Vodafone needs to be refunded in pursuance of the order of the Arbitration Tribunal. Thus, the total outgo on account of this award is estimated to be around Rs 85 Crore.
It may be noted here that in February 2007, Vodafone International Holding (a Netherland Company) had purchased 100 per cent shares of CGP Investments (Holding) Ltd (CGP Ltd.) (a Cayman Islands Company) for USD 11.1 billion from Hutchison Telecommunications International Limited. CGP Ltd. indirectly controlled 67%of Hutchison Essar Limited (HEL Ltd.) - an Indian Company. Hence, through this acquisition, the Vodafone got control over an Indian company -Hutchison Essar Limited.
Sources said that it was argued by the Vodafone that this transaction is not liable for tax in India as the asset transferred i.e. shares of CGP Ltd are the shares of the Cayman Island Company and hence is not shares of an Indian company.
The Income Tax Department felt that such indirect transfer was designed only to avoid capital gain tax in India, it raised a demand of around Rs 7,900 crore by holding that the said transfer of shares of CGP Ltd. involves the indirect transfer of Indian assets, i.e., shares of an Indian company (HEL Ltd).
The Vodafone challenged the order before the Bombay High Court which upheld the order of the Income Tax Department. Later, the company challenged the order of the Bombay High Court before the Supreme Court.
In 2012, the Apex Court gave the judgement in favour of the Vodafone holding that such indirect transfer of assets is not taxable under the existing provisions of the Income Tax Act.
Finance Ministry sources said that in order to stop the abuse and plug loophole of such indirect transfer of Indian assets and also as the intention of the relevant provisions of the Income Tax Act was always to tax the indirect transfer of Indian assets, the Finance Act, 2012 made an amendment to specifically clarify that indirect transfer of assets located in India was always taxable under the Income Tax Act.
With this amendment, the demand on Vodafone revived.Later, the Vodafone invoked international arbitration under the Bilateral Investment Promotion and Protection Agreement (BIPA) between India and the Netherlands.
The Government of India defended its position saying that it has sovereign right to tax capital gain on transfer of assets located in India and is well within its right to take all measures to stop the avoidance of taxes through indirect transfers through tax heavens.