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Indian govt to decide on next step in Vodafone retrospective tax case after studying the order by Permanent Court of Arbitration rejecting India’s tax demand

After Supreme Court had rejected the tax demand against Vodafone, UPA govt had amended the law, making overseas transactions taxable in India with retrospective effect

The Union Government has said that it is studying ruling by the Permanent Court of Arbitration in The Hague, turning down the retrospective tax demand of ₹20,000 crore made to Vodafone by Indian tax authorities. After the Indian authorities lost the case in Hague, the govt has said that it will take a decision on further course of action after studying the order and consulting all aspects of the ruling with its counsels.

A statement issued by the Ministry of Finance said, “The Finance Ministry has said today that it has just been informed that the award in the arbitration case invoked by Vodafone International Holding BV against Government of India has been passed.  The Government will be studying the award and all its aspects carefully in consultation with its 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.”

Earlier today, it was reported that UK telecom major Vodafone Group Plc won its international arbitration against the tax demand by India at the Permanent Court of Arbitration. The court ruled that the conduct by Income Tax department of govt of India was in breach of ‘fair and quittable’ treatment. The Court of Arbitration also noted that by imposing the tax liability on Vodafone, India had violated its investment treaty with Netherlands.

The international tribunal said that Indian govt must stop seeking the tax from Vodafone, and also ruled that India will have to pay $5.47 million to Vodafone as partial compensation for legal costs, 60% of total cost borne by the company.

The case relates to the Vodafone’s acquisition of the stack owned by Hutchison Whampoa in Indian mobile operator Hutchison Essar in the year 2007. The transaction was done by Vodafone International Holdings BV, a Netherlands based subsidiary of Vodafone group, when the company bought 67% stack in Hutchison Essar for around $11.2 billion. The transaction took place in Cayman Islands.

After the deal, the then UPA govt slapped a tax demand of ₹11,000 crore, saying that Vodafone had purchased assets of an Indian company, and therefore the transaction was liable to be taxed in India. Income Tax department had said that the deal was liable for Tax Deduction at Source (TDS), and has Vodafone didn’t deduct it, they are liable to pay it. The tax demand how exceeded ₹20,000 crore including penalties and interests.

Following the demand, Vodafone moved court against the order, and won against government both in Bombay High Court and the Supreme Court of India. In its 2012 judgement, the apex court had ruled that Indian Income tax department had no jurisdiction to levy tax on overseas transaction between companies incorporated outside India. However, the government disagreed with this, and changed the Income Tax Act retrospectively in 2012 to make such transactions taxable in India. The amended the Act by bringing the General Anti-Avoidance Rule (GAAR), which made past overseas deals involving Indian assets taxable retrospectively.

The amendment had nullified the Supreme Court order, again making Vodafone liable to pay the tax. Following that, Vodafone had initiated arbitration proceedings against the government.

Vodafone Idea, which has faced a big blow after the Supreme Court ruling holding the AGR calculation formula by the Indian govt, ended more than 10% higher on the stock exchanges after winning the retrospective tax case.

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