India Challenges Vodafone Arbitration Ruling in Singapore in $2 billion Tax Dispute Case

India has challenged an international tribunal’s verdict in favour of British telecom giant Vodafone Group in a case involving a Rs 20,000 crore demand from the Indian income tax authorities, in Singapore, government sources.

The challenge is against the award, by the Permanent Court of Arbitration at the Hague, that held that the retrospective legislation was in breach of the guarantee of fair and equitable treatment guaranteed under the Bilateral Investment Treaty. The tribunal had also asked the government to cease such breaches of the international treaty.

The government felt that the award needed to be challenged as it had questioned the right of a sovereign to levy tax and not on the tax demand per se, sources said. A decision to challenge was taken at the highest level in the government.

In another blow, New Delhi lost another arbitration case involving the retrospective tax amendment against Cairn Energy Plc where the tribunal has asked the government to pay up over $1.2 billion in damages, plus interest and legal costs.

The tribunal in Vodafone case also directed India to reimburse 4.3 million pounds along with 3,000 euros as legal costs. The government’s total liability was totalling to Rs 85 crore of which Rs 45 crore collected toward the tax levy was to be refunded.

In 2012, the government amended retrospectively its laws to tax offshore deals involving Indian assets, after being thwarted by the Supreme Court, allowing the tax to be levied on Vodafone with retrospective effect.

Vodafone had acquired a controlling stake in Hutchison Essar in 2007 through a purchase that took place overseas in a deal valued at $11.2 billion. India’s tax department said Vodafone should have withheld tax on the deal and issued a notice seeking Rs 11,218 crore, later augmented by Rs 7,900 crore in penalties. Vodafone filed an appeal against income tax notice and won the case in the apex court. But, the government amended the income tax act retrospectively in 2012 after which the company sought international arbitration on the issue.