Global telecom giant Vodafone on Friday won the 6-year pending case against the Government. The case was filed by the Telecom company in 2014 after the government changed an income tax law with a retrospective effect to lay a liability of around 22,000 crores including interests and penalties. Vodafone has been having an upfront battle against the Income Tax Department and the Government of India for more than 10 years now and finally has won the case to waive off its alleged tax burden.
“Vodafone has finally got justice. The government of India came with a retrospective amendment trying to recover the tax which the Supreme Court had struck down… The tribunal has today said that this action is violative of the bilateral investment treaty,” said Anuradha Dutt who is a managing partner of DMD Advocates who represented Vodafone.
The Vodafone group further added,
“The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations”.
After the ruling came shares of the company ended up trading up 12 percent higher on the National Stock Exchange.
A little Backstory. How it all started?
All this started in 2007 when Vodafone bought a major stake in Hutchison Whampoa after paying $11 billion. This purchase included Hutchison’s assets in India along with its mobile network that was under the name ‘Hutch’. After the sale was completed the government demanded an amount of Rs. 7,990 crores in capital gains and withholding tax from Vodafone.
The government argued that the company should pay it the Tax deducted at Source (TDS) on the transaction with Hutchison Whampoa. Vodafone disputed this argument in the Bombay High Court but didn’t have much luck there as the Court ruled its judgment in favor of the Tax Department of India.
Retrospective Tax Amendment by the Finance Minister
Unsatisfied with the Order, the Company then approached the Supreme court of India. In 2012, the apex court passed an order in favor of the telecom company and stated that the government should not make any claim towards tax or any other fees. Dissatisfied by the court’s judgment the government took a drastic step to validate its claim.
In the financial year 2012-13 the then Finance Minister, the late Pranab Mukherjee, imposed an amendment through the financial act. The amendment inserted two explanations to the existing law and gave the government a right to levy the tax, with a retrospective effect from April 1, 1962. Vodafone argued that the move violated principles of fairness and equality.
The Court’s Final Verdict
An award issued by the Permanent Court of Arbitration reads, “The respondent’s [Government of India] conduct in respect of the imposition on the claimant [Vodafone International Holdings BV] of an asserted liability to tax notwithstanding the Supreme Court judgment is in breach of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement [India-Netherlands BIT], as is the imposition of interest on the sums in questions and the imposition of penalties for non-payment of the sums in questions.”
The court ordered the Government to halt the demand for tax demand along with the interests and penalties further levied. Now the government will also have to reimburse the telecom company for the tax already paid by the company to the government which amounts to around 40 crores. This makes a total of approximately 85 crore rupees that the government will have to pay to the Vodafone group. On failure to do so, it will engage the government’s international responsibility.
Future Implications of the Ruling
Now that Vodafone has won the case against the government and has waived off its tax liability, this comes as a ray of hope for many similar cases filed in many international and national arbitral. One such case includes Cairn Energy, which also deals with retrospective tax claims. For any future references, this judgment by the Permanent Court of Arbitration at The Hague will play a major role.