Vodafone Vs India: Vodafone wins Arbitration Case Against India

Some People describe life as a battleground - Everyone needs to fight and survive in their battle. If you survive and emerge triumphant in the battle, you make history. Otherwise, you become history. In history, countless battles have been fought. And, their decisions have directed the course of our history. However, situations change with time, and since we are not living in a colonial era anymore, the battles have changed faces as well. Now, we get to see more of corporate battles.

The battle that we are talking about is between the Income tax department of India and the Vodafone group. The Permanent Court of Arbitration has given the historical decision on this in The Hague; we will come on this later. First, let us discuss a little history of this case so that you get an idea of what happened. 

Where it all started?

Vodafone international holding, which is a Dutch company, entered into the Indian telecommunications industry in 2007. For entering in the industry, the company had two ways either they set up their infrastructure (Opening branches pan India and recruiting people and so on) which is a long process. The second way was to purchase a company which already had a set up in India at an attractive price. 

Therefore Vodafone purchased Hutchison Essar Limited (HEL) for 55,000 crores. And you might know that if you are buying any property in India, then you need to pay a Central Gains Tax to the Government. The person who is buying the property first needs to pay Tax Deduction at Source (TDS), only after this, the buyer pays the excess amount to the seller.

To escape so many taxes, Multinational companies use several ways. One of the most common ways is to open a company in a tax haven country and then use that company as an intermediary and then deal with that company. The Hutch already had a company which was established by them in 1998 in the cayman islands named as the CGP Investment holdings whose parent company was situated in Hongkong named as Hutchison Telecommunications International Ltd. (HTIL).  

The entry of Vodafone

Vodafone bought CGP Investment holdings. This is because the decision of buying CGP Investment holdings means buying Hutchison Essar Limited (HEL) indirectly because CGP Investment holdings had 67% shares of Hutchison Essar Limited. After this deal, Vodafone replaced Hutchison Essar Limited (HEL) in India but operated from the Netherlands. 

The Indian tax Department

Because in this whole deal an Indian company was bought and sold, the Indian Tax Department said this transaction needs to be taxed according to the Indian taxation system, which was around 10,000 crores. But Vodafone refused to pay tax in India because according to them they did not buy Hutchison Essar Limited (HEL), they bought CGP Investment holdings and 67% shares of Hutchison Essar Limited came under this company. So legally, Vodafone does not need to pay tax in India. 

The entry of the judiciary system

The Indian Government filed the case against Vodafone in the Bombay High Court. On 3 December 2008, the Indian Government won this case. The court stated that because an Indian company was involved in the transaction so, Vodafone is liable to pay TDS. Vodafone was instructed by the court to pay 25,000 million rupees in 3 weeks to the Indian Government. 

Vodafone deposited the money, but they challenged this decision in the Supreme court of India. The Indian Government lost this case in the supreme court in January 2012. Because this was a big loophole according to the laws at that time, the benefit of which was taken by Vodafone. The supreme court also said that the Indian tax department has no right to tax the overseas transactions. The Supreme court also gave the order to the Indian tax department to return 25,000 million rupees with 4% interest to Vodafone. 

The amendments made 

In this deal, the Indian Government lost 12000 crores and therefore revised the income tax act to rescue itself from the future losses. It was now clarified in the Income-tax laws that any overseas transaction which indirectly involves any Indian company, the companies will be liable to pay CGT and TDS. 

After the amendments were made in the act, the Government started asking for money from Vodafone. Now Vodafone had no choice because even the supreme court can not do anything if amendments are made in law. But, Vodafone took this matter to the international courts, and this case was pending in the International Arbitration Tribunal. 

The decision by the International Arbitration Tribunal

On 25 September 2020, the International Arbitration Tribunal which is situated in the Hague, Netherlands gave the decision that the demand of the Indian Government is wrong and they cannot charge tax on the transaction of Vodafone, and Indian Government is liable to pay Rs 40 crores to Vodafone as to meet the legal cost of the case. 

Reasons behind this decision

The lawyers representing the case of Vodafone in the International Arbitration Tribunal argued that both the parties which were involved in the decision that is the India and Netherlands have signed a treaty which has a clause of fair and equitable treatment. And the Indian Government is violating this clause when the Government on the retrospective basis by making amendments in the laws. 

The International Arbitration Tribunal said that this is right and Vodafone did not get the Fair and equitable treatment by the Indian Government, and therefore the Indian Government is liable to pay Rs. 40 crores to Vodafone as their legal fees. 

The Bottom Line

This is definitely good news for Vodafone-Idea (now Vi) given their ongoing struggle in the Indian telecom industry due to AGR dues etc. However, it’s a big loss for the Indian Government. Vodafone did its tax planning based on the law at that time, and the Indian Government made changes in the law and on a retrospective basis that’s incorrect. Indian Government might not have drafted the act properly.

The Indian Government says that it is tax evasion, but according to Vodafone, it did its tax planning by being in the laws. Well, different people might have different opinions on this case. But, as of now Vodafone has won it. The Indian Income Tax Department has said that it will pursue the issue further but, what would that lead to, only time will tell.