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International Arbitration Tribunal to begin trial of Vodafone India tax case in February 2019

November 15, 2017

Vodafone Plc has stated that an international arbitration tribunal will begin its trial in the Vodafone India’s tax case in February 2019.

The tribunal was constituted in June 2016 after Vodafone challenged Indian authorities for retrospectively taxing Vodafone’s $11 billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007.

Vodafone challenged the demand of Rs 79.90 billion in capital gains taxes (and Rs 221 billion in total after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT). The operator has stated that the Indian Government has raised objections to the application of the treaty to Vodafone International Holdings BV’s (VIHBV’s) claims and to the jurisdiction of the tribunal under the Dutch BIT. The three-member arbitration tribunal decided to try the jurisdictional objections along with the merits of VIHBV’s claim in a trial now scheduled for February 2019. Earlier, Vodafone had received notices from the Indian tax authority alleging the firm had failed to deduct withholding tax in the Hutchison deal.

The firm challenged the notice and the Supreme Court of India, in January 2012 handed down its judgement, holding that VIHBV’s interpretation of the Income Tax Act 1961 was correct, that the transaction in 2007 was not taxable in India, and that consequently, VIHBV had no obligation to withhold tax. However, the Government of India through the Finance Act 2012 enacted a law to retrospectively tax any gain on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as VIHBV’s transaction with Hutchison in 2007.

In January 2013, Vodafone received a tax demand of Rs142 billion, included principal and interest but it did not include penalties. A year later, the firm used the Dutch BIT to challenge the demand. The two sides could not resolve the issue in negotiations that followed and in April 2014, Vodafone served an arbitration notice.

Consequently in February 2016, the company received a notice of an outstanding tax demand of Rs 221 billion which included interest accruing since the date of the original demand along with a threat to confiscate Indian assets if the tax is not paid. Vodafone has now received an electronically generated demand in respect of alleged principal, interest and penalties in the amount of Rs 190.70 billion. This demand does not appear to have included any element for alleged accrued interest liability.

Vodafone has stated that it will continue to defend vigorously any allegation that VIHBV or Vodafone India Limited is liable to pay tax in connection with the transaction with Hutchison and will continue to exercise all rights to seek redress.


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