Vodafone arbitration: Singapore courtroom to listen to India’s attraction in September

India’s appeal against an international arbitration tribunal ruling that overturned its claim of Rs 22,100 billion in back taxes from Vodafone Group Plc has been transferred to a senior court in Singapore and hearings are scheduled for September, sources said.

An international arbitration tribunal on September 25 last year rejected the tax authorities’ claim for Rs 22,100 billion in back taxes and penalties in connection with the takeover of an Indian operator by the British telecommunications giant in 2007.

In December, the government moved in Singapore to set aside the arbitration award, mainly for judicial reasons. The case has been transferred to a higher court, with a hearing date for September, said two sources familiar with the matter.

The appeal was filed in the Singapore court as the Southeast Asian nation was the seat of the arbitration.

The government has similarly challenged the order of a three-person tribunal in the Hague Permanent Arbitration Court that asked India to return US $ 1.2 billion, plus interest and costs, to British oil and gas company Cairn Energy plc.

The government had used a 2012 law that gave tax authorities the power to reopen previous cases to collect taxes from Vodafone and Cairn on alleged capital gains made a few years ago.

Both Vodafone and Cairn had challenged the tax claims from bilateral investment protection agreements and initiated the arbitration proceedings. India lost both arbitrations.

Sources said the government believes that taxation is not covered by investment protection treaties with various countries and that tax law is a sovereign right in the country.

While the agreements are primarily aimed at protecting investments, the tax is levied on “income” generated by companies.

The 2012 Act, commonly referred to as the Retroactive Tax Act, was enacted after the Supreme Court in January of that year the tax authorities tried against Vodafone International Holdings BV for failing to withhold the withholding tax of $ 11.1 billion paid to Hutchison Telecommunications in 2007 , had declined to purchase a 67 percent stake in a wholly owned subsidiary on Cayman Island that indirectly holds shares in Vodafone India Ltd.

The Finance Act 2012, which retrospectively amended various provisions of the Income Tax Act 1961, included provisions regarding the taxation of gains on the transfer of interests in a non-Indian company that derived significant value from underlying Indian assets such as the Vodaone transaction derives with Hutchison in 2007. She wanted a buyer like Vodafone to be subject to retroactive withholding tax.

Applying this law, the tax authorities slammed Vodafone in January 2013 with a tax claim of Rs 14,200 billion, including the main tax of Rs 7,990 billion and interest, but with no penalties. In February 2016, the tax claim was updated to Rs.22,100 billion plus interest.

Vodafone has challenged this tax claim by initiating arbitration under the Dutch-Indian bilateral investment treaty. The arbitral tribunal decided unanimously in favor of Vodafone.

According to the award, the state must reimburse Vodafone 60 percent of the legal costs and half of the 6,000 euros that Vodafone pays for the appointment of an arbitrator to the panel.

Sources said the Indian government’s liability was Rs 85 crore in legal fees.

In the separate Cairn case, India was asked to pay the value of the shares sold, the confiscated dividend and the withheld tax refunds to collect a portion of the tax claim from the UK firm, plus interest.

Cairn Energy, which made the country’s largest oil discovery, was declared in March 2015 with a claim for a tax of $ 10.247 billion.

In February 2007, Vodafone International Holding (a Dutch company) bought 100 percent of the shares in the Cayman Islands-based company CGP Investments for US $ 11.1 billion to indirectly gain 67 percent control of the Indian company Hutchison Essar Ltd.

The Tax Department believed the deal was aimed at avoiding capital gains tax in India and made a tax claim that was rejected by the Supreme Court in 2012.

In order to stop abuse and close the loophole of such indirect transfers of Indian assets, the government changed the law in 2012 to make such transfers taxable in India.

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