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Will the government challenge Vodafone tax arbitration verdict?

The Delhi High Court wants the Narendra Modi government to disclose whether or not it intends to challenge the international arbitration award favouring Vodafone in the Rs 40,000-crore retro tax tussle, whose origins can be traced back to 2007.

In a recent order, which Moneycontrol has reviewed, a division bench of the Delhi High Court said the government’s legal officers should get “categorical instructions” on the issue by November 17, 2020, the next date of hearing.

“It is deemed apposite that the ASG, for the next date obtains categorical instructions on the aforesaid aspect,” the order said. The ASG is the Assistant Solicitor General, a senior law officer of the government.

What’s at stake?
The government’s stance in this high-profile tax spat is crucial considering the controversial move by the Indian Parliament to retrospectively change its tax laws in 2012. The decision nullified Vodafone’s earlier victory at the Supreme Court and was criticised by global investors and MNCs batting for tax certainty.

Since the Modi regime took over in 2014, there has been no reversal of the retro tax laws, but it has repeatedly assured stakeholders that there will be no repeat of the unpopular step.

The Centre’s decision may also have ramifications on its approach in other, related international arbitration cases involving British oil energy explorer Cairn Energy Plc and mining major Vedanta Resources Plc, both of which have also been hit by the 2012 retro tax laws.

Vodafone’s two-pronged arbitration attack
An arbitration is an alternative, private dispute resolution process outside the courts wherein one of more nominees decide on the dispute via an “arbitral award”.

The Delhi High Court order was passed on an earlier appeal filed by the Indian government which had challenged the British telecom giant’s right to invoke a second arbitration proceeding under the India-UK Bilateral Investment Treaty (BIT).

To be sure, Vodafone has initiated two arbitration proceedings against the Indian government – one under the India-Netherlands BIT and the other under the India-UK BIT. Vodafone’s international arbitration victory falls under the former.

On 25 September, the Permanent Court of Arbitration (PCA) at the Hague ruled in favour of the telco in its 13-year-old tax dispute with the Indian revenue authorities.

The PCA held that the Indian government’s insistence on the Rs 40,000 crore claim, despite the favourable verdict from the Supreme Court, was in breach of the terms of the BIT between India and the Netherlands.

It also held that Vodafone is entitled to fair and equitable treatment under the treaty.

India can challenge the award at the Singapore High Court within a period of 90 days ( from 25 September).

In view of the PCA award under the India-Netherlands treaty, the Delhi High Court also enquired about the fate of the parallel ongoing proceedings before it under the India-UK treaty.

“We have nevertheless enquired from the counsel for Union of India (UOI), whether not in view of the developments since the last date of hearing, the suit from which these appeals arise, has become infructuous,” its order said.

“If India accepts the award and ‘ceases and desists’ from enforcing the tax demand, then the second BIT under the India-UK pact seeking the same relief will become infructuous and accordingly the relief sought by the government of India for stay of the India-UK BIT will also become infructuous,” explained Sachit Jolly, partner at law firm DMD Advocates, which advised Vodafone at the PCA.

How did this epic tax battle being?
The retrospective tax bill of Rs 40,000 crore, which includes alleged tax liabilities, penalties and interest, was claimed by the Indian revenue authorities over Vodafone’s acquisition of the Indian assets of Hutch in 2007. It is widely considered as one of the most controversial global tax disputes over a cross-border deal.

In 2012, the apex court ruled that the tax department had no jurisdiction to impose obligations on Vodafone for a transfer of shares of a foreign company between two non-residents. Then came the sudden twist which shook up the global tax community. The Indian Parliament introduced retrospective amendments to the Income Tax act, which neutralised the top court’s decision.

Vodafone vs Indian taxman: The road ahead
On October 9, 2020, a CNBC TV-18 report said Finance Minister Nirmala Sitharaman held a review meeting and decided to seek the Attorney General’s opinion on a possible appeal against the PCA award.

Tax experts hope the government will not pursue the case anymore.
“The choice for the government is to send a very strong signal to the foreign investors that India is very serious about not changing the rules of the game after an investment has come in OR to stand its ground and challenge the validity of a foreign court and argue that India’s right to tinker with its own laws is unfettered. I do hope the government chooses the former,” said Dinesh Kanabar, CEO, Dhruva Advisors.

Commercial disputes between private parties are subject to arbitration which are confidential proceedings unlike regular open court hearings.
Whether taxation disputes are “commercial disputes “ or fall under the area of “sovereignty” is one aspect that has been raised in government circles post the PCA award. If tax spats do fall under “sovereignty”, the big question is whether India will surrender its sovereign powers to private commercial arbitrators.

A recent note by law firm Nishith Desai Associates summarises the government’s position. “The PCA award negates India’s general position that tax disputes do not come under the ambit of investment treaties. However, the position holds water for treaties that specifically exclude tax disputes from their scope,” the note said.

It further added, “New bilateral investment treaties entered into by India such as the 2018 India Belarus BIT and the 2020 India Brazil BIT have mostly excluded measures regarding taxation or enforcement of taxation obligations from their scope. Going forward, it is likely that India will fiercely negotiate on incorporation of such exclusions in bilateral investment treaties.”

On the other hand, Vodafone has highlighted that “ any attempt by India to enforce the tax demand would be a violation of India’s international law obligations.” Money Control

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