British telco Vodafone Group Plc won a decade-long battle against the Indian tax department’s demand of Rs 20,000 crore (US$2.8 million), stemming from its entry into the country in 2007.
The victory in the Permanent Court of Arbitration in The Hague may finally signal an end to the retrospective tax amendment case that had become a symbol of the country’s aggressive tax collection methods, experts said.
On the back of that victory, the Vodafone Idea stock rose 13.6% to close at Rs 10.36 on the Bombay Stock Exchange.
The government will examine the order and further action will be taken after seeking legal opinion, including whether to appeal against the decision in the appropriate court in Singapore, said persons with knowledge of the matter.
There was also no question of the government losing US$2.8 million as Vodafone had not paid the original tax demand or the interest and penalties, they said. The tribunal had not accepted Vodafone’s demand for award of damages, they added.
The tribunal ruled that the Indian tax department was in breach of “guarantee of fair and equitable treatment” of the terms laid out in the India-Netherlands bilateral investment treaty (BIT), said one of the persons. The tribunal ruled that Vodafone was entitled to protection under this guarantee, they said.
The government should ensure that such breaches of the international treaty should cease, the court said, according to them. The government changed the rules in 2012 after being thwarted by the Supreme Court, allowing the tax to be levied on Vodafone with retrospective effect.
Vodafone had acquired a controlling stake in Hutchison Essar in 2007 through a purchase that took place overseas in a deal valued at $11.2 billion. India’s tax department said Vodafone should have withheld tax on the deal and issued a notice seeking Rs 11,218 crore, later augmented by Rs 7,900 crore in penalties.
The tribunal also directed India to reimburse £4.3 million along with ¤3,000 as legal costs to the British telecom company. As per early estimates, the the government’s total liability is about Rs 85 crore.
It may have to refund the Rs 45 crore already collected toward the tax levy and £4.3 million, which is 60% of the tribunal’s administrative cost. The remaining 40% of the cost will be borne by Vodafone, sources said.
Vodafone Group welcomed the development. “Vodafone confirms that the investment treaty tribunal found in Vodafone’s favour. This was a unanimous decision, including India’s appointed arbitrator Mr Rodrigo Oreamuno,” it said in a statement on Friday. “The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations.”
Vodafone India merged with Idea Cellular in 2018 to form Vodafone Idea. The ruling will come as a relief to the company, which faced total AGR dues of more than Rs 58,000 crore (US$8.12 million). Of this, the telco has already paid nearly Rs 8,000 crore (US$1.12 million).
Senior lawyer Anuradha Dutt of DMD Advocates, representing Vodafone International Holdings in the matter, said that the tribunal’s decision was a second victory after India’s Supreme Court had ruled in its favour in 2012. “Finally, we have got justice for Vodafone,” she told ET. “Now an international tribunal has also said that imposing tax, collecting interest and penalties is breach of international obligations of free and equitable treatment guaranteed under the BIT.”
Experts said the ruling was a setback for the tax department. “The verdict is definitely a blow for the aggressive position taken by revenue,” said Divakar Vijayasarathy, managing partner at DVS Advisors. “We hope that in future regulators would be cognisant of their international obligations before taking a unilateral position to tax a transaction.”