Vodafone Arbitration Case: All Options Open, Govt to Take Action After Studying Award

The government on Friday said it will consider all options, including legal remedies, with regard to Vodafone arbitration case which went in the company’s favour. British telecom giant Vodafone Group plc won the arbitration case against the Indian government over a demand for Rs 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 Finance Ministry in a statement said that it has just been informed that the award in the arbitration case invoked by Vodafone International Holding BV against Government of India has been passed.

“The government will be studying the award and all its aspects carefully in consultation with our counsels. After such consultations, the government will consider all options and take a decision on further course of action including legal remedies before appropriate fora,” it said. The Government of India’s liability will be restricted to about Rs 75 crore — Rs 30 crore in cost and another Rs 45 crore in tax refund, sources with direct knowledge of the matter said.

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

Sources said the tax demand was on the UK-listed company and Vodafone’s India venture faced no liability. Vodafone merged its India operations with billionaire Kumar Mangalam Birla’s conglomerate, but the combined entity Vodafone Idea Ltd is facing a USD 7.8 billion bill in past statutory dues.

Tax authorities had in September 2007 served notice to Vodafone International Holdings BV for its alleged failure to deduct withholding tax from consideration paid to the Hutchison Telecommunications International Ltd. Vodafone challenged this in the Supreme Court, which set it aside 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. The company was in January 2013 served a tax notice of Rs 14,200 crore after including interest on the principal amount.

A year later, Vodafone challenged the tax demand under the Dutch BIT.