India loses case on Vodafone retro tax

New Delhi: British telecom giant Vodafone Group plc on Friday won an arbitration against the Indian government over a demand for `22,100 crore in taxes using retrospective legislation.

An international arbitration tribunal ruled that India’s demand in past taxes were in breach of fair treatment under a bilateral investment protection pact. 

“The award is confidential, but Vodafone can confirm that the tribunal has found (it) in Vodafone's favour,” Vodafone Group said in a statement. “We are studying the lengthy documents and can make no further comment at this time.”

It was not immediately known if the Indian government will abide by the arbitration award. Sources said the tax demand was on the UK-listed company and Vodafone’s India venture faced no liability. Vodafone India was later on merged with Aditya Birla Group’s telecom company Idea.

Sources with direct knowledge of the matter said the government of India’s liability will be restricted to about `75 crore. 

Before the arbitration tribunal, Vodafone had challenged India’s usage of a 2012 legislation that gave it powers to retrospectively tax deals like Vodafone’s $11-billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007. It challenged the demand of `7,990 crore in capital gains taxes (`22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT). 

Tax authorities had in September 2007 served notice to Vodafone Interna-tional Holdings BV (VIH-BV) for its alleged failure to deduct withholding tax from consideration paid to the Hutchison Telecomm-unications International Ltd. However, Vodafone challenged this in the Supreme Court, which set it aside tax notice in January 2012, saying that the transaction was not taxable in India and so the company had no obligation to withhold tax. In May that year, Parliament passed the Finance Act 2012 that amended various provisions of the Income-Tax Act, 1961, with retrospective effect to tax any gain on transfer of shares in a non-Indian company which derives substantial value from underlying Indian assets. In January 2013, the company was served a tax notice of `14,200 crore after including interest on the principal amount. A year later, Vodafone challenged the tax demand.

Sources said the company in April 2014 served the notice of arbitration after out-of-court dispute resolution talks failed. Vodafone has always maintained that there is no liability and that it will vigorously defend any allegation that it is liable to pay tax.