Vodafone group: India challenges Vodafone arbitration ruling in Singapore - source

India has upped the ante against Vodafone by challenging an earlier award, by the Permanent Court of Arbitration at the Hague, that held that the retrospective legislation was in breach of the guarantee of fair and equitable treatment guaranteed under the Bilateral Investment Treaty.

The tribunal had also asked the government to cease such breaches of the international treaty.

It was the 2012 amendment that brought overseas indirect transfers retrospectively into the tax net. According to the Finance Ministry, the tax department was duty bound to protect public money if there was an attempt to avoid levies by routing transactions via tax-havens.

“Parliament rightly clarified its intent through an amendment in the Income Tax Act and, therefore, such a measure cannot be opposed by simply labelling it as a retrospective amendment,” the person said. “The question is should the government of India have allowed such loopholes to continue? The answer is obviously no.”

If there is any attempt to avoid taxes by routing transactions through a tax haven such as the Cayman Islands, the government is entitled to take all measures, including amending the law, to stop such abuse, a source had said back then. The Vodafone-Hutchison deal was executed in the Cayman Islands.

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.

Vodafone filed an appeal against income tax notice and won the case in the apex court. But, the government amended the income tax act retrospectively in 2012 after which the company sought international arbitration on the issue.

Another arbitration case

Cairn Energy Plc said December 23 that it has won the arbitration against the Indian government over a tax dispute arising from demand of $1.2 billion from the tax department on listing of Indian operations back in 2007.

The oil-major said that the tribunal had announced the award unanimously following which the Indian government will have to pay the UK-based company damages of $1.2 billion and interest.

Cairn Energy had filed a dispute in 2015 against the demand raised by the tax department of Rs 10,247 crore relating to re-organisation of the group in 2006. The income tax department had then said that Cairn UK Holdings, a fully owned subsidiary of Cairn Energy, had made capital gains of over Rs 24,000 crore before the public listing of Cairn India.

They said that Cairn Energy effectively held 69% of Cairn India. In 2011, Cairn India was sold to Vedanta Group, except for 9.8% stake. The residual stake sale was barred by the income tax department, and dividend payments by Cairn India to Cairn Energy were also frozen.

“I always felt Vodafone tax decision was an erroneous decision. This government will not be taking any retrospective decision,” the late Arun Jaitley, then finance minister, had said at the Economic Times Global Business Summit in February 2018.

In his first budget speech on July 10, 2014, after the NDA took office, Jaitley had said the sovereign right of the government to undertake retrospective legislation was unquestionable, but “this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate”.

Ministry sources had said then that the amendment in the Finance Act of 2012 specifically clarified that the indirect transfer of assets located in India was always taxable under the Income Tax Act to plug any loopholes and ensure that it applied to transactions that took place overseas.