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Govt to explore all legal options in Rs 20,000 crore Vodafone tax arbitration case

Govt to explore all legal options in Rs 20,000 crore Vodafone tax arbitration case
The Finance Ministry is considering all legal options before it decides the future course of action in the Rs 20,000 crore Vodafone tax arbitration case. The government was taken by surprise when the Permanent Court of Arbitration in Hague held that the conduct of the Indian authorities was in breach of "fair and equitable" treatment assured under the Bilateral Investment Treaty (BIT), signed between The Netherlands and India.
Reacting to the development on Vodafone Group winning the arbitration against India, the Finance Ministry said, "It has just been informed that the award in the arbitration case invoked by Vodafone International Holding BV against the Government of India has been passed. The Government will be studying the award and all its aspects carefully in consultation with our counsels. After such consultations, the government will consider all options and take a decision on further course of action including legal remedies before appropriate fora."
Meanwhile, Finance Ministry sources said that there is no question of India losing Rs 20,000 crore in Vodafone tax case as reported in some sections of the media. Sources clarified that since Vodafone had not paid the tax demand of Rs 7,900 crore and interest and penalty on it, the question of India losing Rs 20,000 crore does not arise. Also, the Tribunal has not accepted the claim of Vodafone for award of damages.
Sources said that the government will be examining the order carefully and further appropriate action would be taken after obtaining legal opinion, including, inter alia, challenging the award by filing of an application before the appropriate court in Singapore, which is the seat of the arbitration.
FinMin Sources acknowledged that the Arbitration Tribunal vide its order dated September 25, 2020, ruled in favour of Vodafone and held that the tax demand raised by the Indian Income Tax Department on the basis of the retrospective amendment is in violation India-Netherlands BIPA.
According to sources, the tribunal has directed India to bear 60 percent of cost incurred by Vodafone towards legal representation and assistance, which comes to 43,27,294.50 pounds plus 50 percent of the fees paid by Vodafone to the appointing authority, which comes to 3,000 euros. Thus, the total cost of reimbursement works out in Indian rupees to around Rs 40 crores. In addition, an amount of Rs 44.74 crores collected from Vodafone needs to be refunded in pursuance of the order of the Arbitration Tribunal. Thus, the total outgo on account of this award is estimated to be around Rs 85 crore.
In February 2007, Vodafone International Holding (a Netherland Company) had purchased 100 percent shares of CGP Investments (Holding) Ltd (CGP Ltd) (a Cayman Islands Company) for $11.1 billion from Hutchison Telecommunications International Limited. CGP indirectly controlled 67 percent of Hutchison Essar Limited (HEL Ltd) - an Indian company. Hence, through this acquisition, Vodafone got control over an Indian company -Hutchison Essar Limited.
Sources said that it was argued by Vodafone that this transaction is not liable for tax in India as the asset transferred ie shares of CGP Ltd are the shares of the Cayman Island Company and hence is not shares of an Indian company. The Income Tax Department felt that such indirect transfer was designed only to avoid capital gain tax in India, it raised a demand of around Rs 7,900 crore by holding that the said transfer of shares of CGP Ltd. involves indirect transfer of Indian assets, ie, shares of an Indian company (HEL).
Vodafone challenged the order before the Bombay High Court which upheld the order of the I-T Department. The Vodafone challenged the order of the Bombay High Court before the Supreme Court. The Supreme Court in 2012 gave the judgement in favour of Vodafone, holding that such indirect transfer of assets is not taxable under the existing provisions of the Income Tax Act.
FinMin sources said that in order to stop the abuse and plug loophole of such indirect transfer of Indian assets and also as the intention of the relevant provisions of the Income Tax Act was always to tax indirect transfer of Indian assets, the Finance Act, 2012 made an amendment to specifically clarify that indirect transfer of assets located in India were always taxable under the Income Tax Act. With this amendment the demand on Vodafone revived.
Later, Vodafone invoked international arbitration under the Bilateral Investment Promotion and Protection Agreement (BIPA) between India and the Netherlands. Government of India defended its position saying that it has sovereign right to tax capital gain on transfer of assets located in India and is well within its right to take all measures to stop avoidance of taxes through indirect transfers through tax heavens.
The Parliament rightly clarified its intent through an amendment in the I-T Act and therefore such measure cannot be opposed by simply labelling it as a retrospective amendment. The question is should the government of India have allowed such loopholes to continue? The answer is obviously no. It is duty bound to take all steps to protect public money and exchequer and if there is any attempt to avoid the taxes by routing the transaction through a tax heaven like Cayman Island, it was entitled to take all measures including amendment in law to stop such abuse, said the sources.
Experts said that Vodafone was expected to get this relief. Amit Maheshwari, partner at AKM Global said, "This victory of Vodafone under the Bilateral Investment Treaty between India and Netherlands was expected, considering the widespread condemnation India faced on its decision to retrospectively amend the law to tax Vodafone, overruling a favorable judgment they got from the Supreme Court against the tax office."
"The Bilateral Investment Treaty (BIT) entered by India in the past were wide enough to cover tax issues. This was something which India was not comfortable with and therefore India came out with a model Bilateral Investment Treaty in 2015 which left out tax and the most favoured-nation clause among various other changes. To date, India has terminated BITs with more than 60 countries. However, the new model BITs have found few takers with some countries like Bangladesh entering BITs, based on the 2015 model. Going forward, this decision will not result in more companies opting for this approach as most BITs have already been terminated by India."

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