British telecom major Vodafone has won the case against India over a retrospective tax demand, CNBC-TV18 has reported. The Permanent Court of Arbitration at Hague has ruled that the conduct of India's tax department is in breach of "fair and equitable" treatment.
Observing that the retrospective taxation despite the Supreme Court's judgment in favor of Vodafone was in breach of the bilateral investment treaty, the court has directed India to reimburse a sum of Rs 40.3 crore (GBP 4.3 Million) to Vodafone.
The telco had moved the International Court of Justice (ICJ) in 2016 due to a lack of consensus between the parties' arbitrators in finalising a judge for the tax dispute.
Following this, a tribunal headed by Sir Franklin Berman was constituted in June 2016 after Vodafone challenged India's use of a 2012 legislation that gave it powers to retrospectively tax deals like Vodafone's $11 billion acquisition of a 67 percent stake in the mobile phone business owned by Hutchison Whampoa in 2007. This tax law had been enacted by India with retrospective effect, thereby sidestepping a Supreme Court judgement that went in the company's favour.
The telco challenged India's demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT).
A timeline of the case
In 2007, Vodafone received notices from the India's tax authorities alleging that the firm had failed to deduct withholding tax in the Hutchison deal.
The firm challenged the notice and the Supreme Court of India in January 2012 "handed down its judgement, holding that VIHBV's interpretation of the Income Tax Act 1961 was correct, that the transaction in 2007 was not taxable in India, and that consequently, VIHBV had no obligation to withhold tax," the statement said.
However, the Government of India through the Finance Act 2012 enacted a law to retrospectively tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as VIHBV's transaction with Hutchison in 2007.
Vodafone said that on January 3, 2013, it received a tax demand of Rs 14,200 crore, which included principal and interest but it did not include penalties.
The firm on January 10, 2014, used the BIT to challenge the demand. The two sides could not resolve the issue in negotiations that followed and on April 17, 2014, Vodafone served an arbitration notice.
On February 12, 2016, the telecom company received a notice "of an outstanding tax demand of Rs 22,100 crore (which included interest accruing since the date of the original demand)" along with a threat to confiscate Indian assets if the tax is not paid.
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