The Permanent Court of Arbitration at The Hague on Friday, 25th September 2020 gave the ruling that India’s retrospective demand of 22,100 crores as capital gains and withholding tax imposed on Vodafone for a 2007 deal was in breach of the guarantee of fair and equitable treatment. The court has also asked India not to pursue the tax demand further against Vodafone Group.
What was the Retrospective taxation case between Vodafone and India?
In May 2007, Vodafone bought a 67% stake in Hutchison Whampoa for 11 billion dollars. This included the mobile business and other assets of Hutchison in India. In September 2007, the Indian government for the first time raised a demand of 7,990 crores in capital gains.
Vodafone challenged this demand in the Bombay High Court, which ruled in favor of the Income Tax Department. Vodafone then challenged the High Court judgment in the Supreme Court. In 2012 the Supreme Court ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct. It should not have to pay any taxes for the stake purchase.
The then Finance Minister of India, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling. He proposed an amendment to the Finance Act. This gave the Income Tax Department the power to retrospectively tax such deals. The duty to pay the taxes fell back on Vodafone. The case then became infamously known as the “retrospective taxation case”.
This amendment received criticism from investors globally. Following international criticism, India’s try began to settle the matter in a peaceful way with Vodafone. But was unsuccessful to do so. By 2014, all attempts by the telco and the Finance Ministry to settle this issue had failed.
The Permanent Court of Arbitration’s Ruling at The Hague
One of the major factors for the court to rule in favor of Vodafone was the violation of the Bilateral Investment Treaty and the United Nations Commission on International Trade Law.
Article 9 of the Bilateral Investment Treaty states that any dispute between an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party shall as far as possible be settled peacefully through negotiations.
Article 3 of the arbitration rules of the United Nations Commission on International Trade Law, states that the constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal.
In its ruling, the court asked India to stop efforts to recover the said taxes from Vodafone. This was because of the breach of the terms of the agreement by India. This brought down the curtains on the long-running retrospective taxation case.