Arbitration Tribunal to Hear Vodafone’s Challenge to India Seeking Rs 22,100 Crore in Taxes

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In February 2019, an international arbitration tribunal will hear the UK-based telecom operator Vodafone's challenge to India using retrospective legislation to seek Rs 22,100 crore in taxes, a new report by PTI stated. The arbitration tribunal will be headed by Sir Franklin Berman and will hear the government's objection to tax matters being covered under the Netherlands-India Bilateral Investment Treaty, that was used by Vodafone to raise an arbitration over the tax demand.

Vodafone India Tax issue

“The tribunal, headed by Sir Franklin Berman, will hear the government’s objection to tax matters being covered under the Netherlands-India Bilateral Investment Treaty, which was used by Vodafone to trigger an arbitration over the tax demand,” a senior official with direct knowledge of the development said to PTI.

The senior official also added that India also challenged tribunal’s jurisdiction to decide on the matter. Having said that, Vodafone will have to file its response to the government by July this year, India will respond to the same by December this year, following which the tribunal's hearing will happen in February 2019.

For the unaware, Vodafone, the British telecom giant has challenged India using a 2012 legislation which gave the telco powers to retrospectively tax deals like $11 billion acquisition of 67% stake of Hutchison Whampoa's mobile phone business back in 2007. It has challenged the demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the treaty, the report added.

Back in September 2007, tax authorities served a notice to Vodafone regarding its alleged failure to debut the withholding tax from consideration paid to the Hutchison Telecommunications.

And the same was set aside by Supreme Court in January 2012, touting the “transaction was not taxable in India,” and so does the company had no “obligation to withhold tax.” In May 2012, the Parliament passed the Financial Act 2012 that amended various provisions of the Income Tax Act 1961 with backwards-looking effect to tax any gain on “transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets.”

Later in January 2013, Vodafone served a tax notice of Rs 14,200 crore, including the interest on the principal amount. Then in 2014, Vodafone challenged the tax demand under the Dutch BIT. The senior official also added that Vodafone served the notice of arbitration after out-of-the-court dispute resolution talks failed in April 2014.

In February 2016, the tax department served a demand notice of Rs 22,100 crore, which also included the interest that needs to be accrued since the date of original demand. “The tax department in February 2016 served a demand notice of Rs.22,100 crore, including interest accruing since the date of the original demand,” noted the report.

The telco has stated that “there is no liability and that it will continue to defend vigorously any allegation that VIHBV or Vodafone India Ltd is liable to pay tax in connection with the transaction with Hutchison and will continue to exercise all rights to seek redress”.

The hearing is now scheduled for February 2019, while Vodafone is slated to reply in July 2018, following which India will send its reply in December 2018.

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