Retro tax: India challenges Voda arbitration ruling in Singapore

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The last is yet to be heard on the issue of retrospective tax, as India has appealed before the Singapore Court against the tax arbitral award favouring British telecom giant Vodafone.

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.

While there was no official communication from the Indian government, sources in the know confirmed that the government has decided to go for an appeal. This tax dispute involves approximately $2 billion. In September, an international arbitration tribunal in The Hague had ruled that the tax demand from Vodafone, based on a retrospective legislation, was in ‘breach of the guarantee of fair and equitable treatment’ under the India-Netherlands Bilateral Investment Treaty. India had 90 days to appeal the ruling.

Reacting to this move by the Indian government, Anuradha Dutt, Counsel for Vodafone, told BusinessLine: “It will take a couple of years to arrive at a final decision. Also, there is a possibility that the government might challenge the arbitration award in favour of Cairn Energy too.”

Echoing similar sentiments, a leading corporate lawyer who has been looking into retrospective taxation, said if they (government) do not appeal in the Vodafone case, it will become very difficult to appeal against the Cairn order. Both the cases deal with the issue of retrospective taxation.

“The penalty that the government faces in the case of Cairn is approximately ₹9,000 crore. That is why the government waited till the last date before appealing against the Vodafone order. They were basically waiting for the Cairn order,” he said.

 

A tough call for Vodafone

There is feeling in the legal circle that it will not be easy for Vodafone to get the award implemented even if the challenge is dismissed by the Singapore Court. One of the reasons could be that India is not a signatory to the International Centre for Settlement of Investment Disputes (ICSID) convention, which has been signed by 163 countries; so, India is not obliged to honour the award. However, it is also a matter of perception.

The issue of retrospective taxation came to light when the government pursued what it described as a ‘test case’ against Vodafone, seeking to tax indirect transfer of shares to a non-Indian company. In January 2012, the Supreme Court unanimously ruled in favour of Vodafone, confirming that indirect transfer of shares to a non-Indian company will not attract tax in India.

Less than two months after the apex court verdict, the Finance Ministry introduced an amendment to Section 9(1)(i) of the Income Tax Act 1961 through the Finance Bill 2012. Among other things, it explained that shares in a non-Indian company shall always be deemed to have been situated in India if its value is derived substantially from underlying Indian assets. Describing it as ‘clarificatory’ in order to effectively overturn the Supreme Court’s decision in Vodafone, the Finance Act 2012 declared that the retrospective amendment shall be deemed to have taken effect from April 1, 1962 (fifty years earlier).

Following this, the tax dispute moved to the international stage when Vodafone commenced arbitration process and managed to defend its side.



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