Business Desk, ETV Bharat: The Vodafone tax dispute case has taken another turn. The Indian government has finally decided to challenge the international court’s verdict that ruled in favour of the British telecom company in the Rs 22,000 crore tax demand case just before the deadline to do so was about to end on 24 December.
An appeal has been filed against the 25 September ruling by the Singapore seat of the Permanent Court of Arbitration of The Hague that said that India’s imposition of a tax liability on Vodafone was in breach of an investment treaty signed between India and the Netherlands.
If you are not aware of what the Vodafone tax dispute is all about, here’s a quick explainer on the case along with a timeline of important events.
The transaction in question
In 2007, the Dutch affiliate of the Vodafone Group, Vodafone International Holdings bought 67% stake in Indian telecom company Hutchison Essar Ltd for $11.1 billion from Caymon Islands-based Hutchison Telecommunications International Ltd (HTIL).
But the transaction was not that simple. It happened through a web of companies.
Another major firm in picture was CGP Investments Ltd which was also based in the Cayman Islands but fully owned by HTIL. CGP owned shares in several Mauritius-based entities which in turn owned stake in some Indian companies and ultimately held a 67% stake in Hutchison Essar — the portion that was sold to Vodafone International Holdings.
So, technically, the transaction took place between Vodafone International Holdings and HTIL for CGP’s assets that were based in India. Note here that none of these three companies are based in India.
What’s the dispute?
The central point of the dispute if that one side claims that since the transaction involves only non-Indian companies, it should fall out of the Indian tax ambit.
However, the Indian tax department said that since underlying operating assets of the deal involve an Indian company Hutchison Essar, therefore Vodafone should have withheld capital gains tax on the deal.
Withholding tax is a government requirement for the payer of an item of income to deduct tax from the payment, and pay that tax to the government.
The then UPA government had said that Vodafone Group was liable to pay a total of Rs 22,100 crore including interest and penalties.
Read more: CAIT urges FM to defer rollout of Rule 86B in GST
What happened then?
Vodafone protested against the demand saying that the transaction did not involve the transfer of any capital asset situated in India. Moreover, it added that India and the Netherlands had signed a bilateral investment treaty (BIT) in 1995, which exempted such investments from taxation.
The matter went to the Bombay high court. The court sided with the tax authorities, saying that Vodafone was liable to pay the tax dues.
But Vodafone appealed against the verdict in the Supreme Court. And, in 2012, the apex court reversed the Bombay high court judgment and held that the company was not liable to pay any tax.
It seemed then that the case was closed. But, the same year, after the apex court verdict, the Indian government shocked everyone by amending the Income Tax Act 1961 – on the basis of which the SC judgment had been delivered.
The 2012 amendment brought overseas indirect transfers into the tax net. The then finance minister Pranab Mukherjee introduced the Finance Bill 2012 and the law was amended retrospectively and was given effect from 1961.
Then, as expected, the Indian government renewed its demand of Rs 22,100 crore in capital gains tax from Vodafone.
International court comes in picture
Vodafone Group then approached the Permanent Court of Arbitration at The Hague.
The company argued that the imposition of tax claims through retrospective amendment, even when the final word had already been said by the Indian Supreme Court, amounted to a violation of fair and equitable treatment promised under the India-Netherlands Bilateral Investment Treaty.
Earlier this year, the international court ruled in favour of Vodafone. It held that the Indian government had breached the terms of the agreement and must stop efforts to recover the said taxes from the company.
The court gave 90 days to India to file an appeal against the ruling. And, after much speculation, the government did file an appeal, just before that deadline was supposed to end, leaving the dispute still unresolved.
