Arbitration panel to hear Vodafone challenge to Rs 22,100 cr tax in Feb 2019

An international arbitration tribunal will in February next year begin hearing in British telecom giant Vodafone's challenge to India using a retrospective legislation to seek Rs 22,100 crore in taxes. 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.

India has also challenged tribunal's jurisdiction to decide on such matters, he said. While Vodafone is supposed to file its response to the government objection by July, India will respond to this by December, he said, adding that thereafter the tribunal will begin hearing in February 2019. Vodafone has challenged India using a 2012 legislation that gave it powers to retrospective tax deals like Vodafone's USD 11-billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa 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. Tax authorities had in September 2007 served notice to Vodafone International Holdings BV for its alleged failure to deduct withholding tax from consideration paid to the Hutchison Telecommunications International Ltd. Vodafone challenged this in the Supreme Court, which in January 2012 set it aside saying the transaction was not taxable in India and so the company had no obligation to withhold tax.

In May that year, Parliament passed the Finance Act 2012 that amended various provisions of the Income Tax Act 1961 with retrospective effect to tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets. The company was in January 2013 served a tax notice of Rs 14,200 crore after including interest on the principal amount. A year later, Vodafone challenged the tax demand under the Dutch BIT.

The official said the company in April 2014 served the notice of arbitration after out-of-the-court dispute resolution talks failed. 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. Vodafone has maintained 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".