Will take appropriate action, says Finance Ministry on Vodafone tribunal setback

Updated on Sep 26, 2020 08:13 AM IST

The government will obtain legal opinion on the tribunal order and explore the possibility of filing an application before the appropriate court in Singapore, the seat of the arbitration

An international arbitration tribunal on September 25 ruled in favour of Vodafone(Reuters)
An international arbitration tribunal on September 25 ruled in favour of Vodafone(Reuters)
Hindustan Times, New Delhi | ByRajeev Jayaswal

The government may take appropriate action on the Vodafone tax case, two finance ministry officials said adding that there is no question of India losing Rs 20,000 crore as Vodafone did not pay the tax, including interest and penalty on it

Also, the Tribunal has not accepted the claim of Vodafone for award of damages, they said requesting anonymity.

They said the government would examine the order carefully and further appropriate action would be taken after obtaining legal opinion, including, challenging the award by filing of an application before the appropriate court in Singapore, which is the seat of the arbitration.

An international arbitration tribunal on September 25 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 of the India-Netherlands Bilateral Investment Promotion Agreement (BIPA).

According to sources, the tribunal has directed India to bear 60% of cost incurred by Vodafone towards legal representation and assistance, which comes to 43,27,294.50 pounds and 50% of the fees paid by Vodafone to the appointing authority, which comes to 3,000 Euros, they said.

“Thus, the total cost of reimbursement works out in Indian rupees to around Rs. 40 crore. In addition, an amount of Rs. 44.74 crore 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,” one of the officials said.

It may be noted here that in February 2007, Vodafone International Holding (a Netherland Company) had purchased 100% shares of CGP Investments (Holding) Ltd (CGP Ltd.) (a Cayman Islands Company) for $11.1 billion from Hutchison Telecommunications International Limited. CGP Ltd. indirectly controlled 67%of Hutchison Essar Limited (HEL Ltd.) -- an Indian Company. Hence, through this acquisition, Vodafone got control over an Indian company -Hutchison Essar Limited.

Officials said it was argued by Vodafone that this transaction was not liable for tax in India as the asset transferred i.e. shares of CGP Ltd are the shares of the Cayman Island Company and hence was 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. involved indirect transfer of Indian assets, i.e., shares of an Indian company (HEL Ltd).

Vodafone challenged the order before the Bombay High Court which upheld the order of the Income Tax Department. Vodafone next challenged the order 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 existing provisions of the Income Tax Act.

Finance ministry officials said 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,” a second official said.

Later, Vodafone invoked international arbitration under the Bilateral Investment Promotion and Protection Agreement (BIPA) between India and the Netherlands. The Indian government 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 havens, officials said.

“The Parliament rightly clarified its intent through an amendment in the Income Tax Act and, therefore, such measure cannot be opposed by simply labelling it as a retrospective amendment,” the second official said.

“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 haven like Cayman Island, it is entitled to take all measures including amendment in law to stop such abuse,” he said.

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