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Vodafone case, and the Hague Court Ruling

Vodafone case, and the Hague Court Ruling

Context:

The Permanent Court of Arbitration at The Hague ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on Vodafone Group for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.

  • The court has asked India not to pursue the tax demand any more against Vodafone Group.

About the case:

  • In 2007, Vodafone had bought a 67% stake in Hutchison Whampoa for $11 billion. This included the mobile telephony business and other assets of Hutchison in India.
  • Later, the Indian government for the first time raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.
  • Vodafone challenged the demand notice in the Bombay High Court, which ruled in favor of the Income Tax Department.
    • Subsequently, Vodafone challenged the High Court judgment in the Supreme Court, which ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.
  • The same year, the then Finance Minister, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals.
    • Once Parliament passed the amendment to the Finance Act in 2012, the onus to pay the taxes fell back on Vodafone. ???????
  • The Act was passed by Parliament that year and the onus to pay the taxes fell back on Vodafone. The case had by then become infamous as the ‘retrospective taxation case’.

Retrospective taxation:

  • It allows a country to pass a rule on taxing certain products, items, or services, and deals and charge companies from time behind the date on which the law is passed.
  • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
  • Governments use a retrospective amendment to taxation laws to “clarify” existing laws.
  • Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have retrospectively taxed companies.

Bilateral Investment Treaty:

  • In 1995, India and the Netherlands had signed a BIT for the promotion and protection of investment by companies of each country in the other’s jurisdiction.
  • The treaty had then stated that both countries would strive to “encourage and promote favorable conditions for investors” of the other country.
  • Under the BIT, the two countries would ensure that companies present in each other’s jurisdictions would be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other.
  • While the treaty was between India and the Netherlands, Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, had bought the Indian business operations of Hutchinson Telecommunication International Ltd. This made it a transaction between a Dutch firm and an Indian firm.
  • In 2016, the BIT between India and the Netherlands expired.

Permanent Court of Arbitration:

  • One of the major factors for the Court of Arbitration to rule in favor of Vodafone was the violation of the BIT and the United Nations Commission on International Trade Law (UNCITRAL).
  • In 2014, when the Vodafone Group had initiated arbitration against India at the Court of Arbitration, it had done so under Article 9 of the BIT between India and the Netherlands.
    • Article 9 of the BIT:  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 amicably through negotiations.
    • Article 3 of the arbitration rules of UNCITRAL: 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 arbitration tribunal also mentioned that now since it had been established that India had breached the terms of the agreement, it must now stop efforts to recover the said taxes from Vodafone.

Source: Indian Express