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The Vodafone Tax Issue


The International Court of Justice, Hague has rejected a plea by the Indian government to replace the presiding arbitrator in the 22,000 Cr Vodafone Tax Arbitration.

The Government of India had taken the plea that Sir Berman, the present presiding arbitrator in this case was ineligible on account of his nationality, as both Sir Berman and the Vodafone PLC are British.

The Telecomm giants had approached the ICJ after being unable to zero down a choice of presiding arbitrator acceptable by both the parties. Vodafone in April 2013 had invoked the India-Netherlands bilateral investment treaty, seeking to resolve the tax demand made by the Indian government through a retrospective amendment to bypass the Supreme Court judgment that was in favor of Vodafone.

The Supreme Court today ruled in favor of Vodafone saying capital gains tax is not applicable to the telecom major. The apex court also said the Rs 2, 500 Cr which Vodafone has already paid should be returned to Vodafone with interest.

The Supreme Court was convinced by the view that the business connection rule did not apply to capital transactions. According to the business connection rule, if a non-resident earns and receives income abroad thanks to a business connection in India, he would have to pay tax in India pro tanto i.e. to the extent of business connection in India. This applies squarely to the Vodafone case because the Cayman Island Company is a single charter company, to control the Indian operations of the telecom business in India of Hutchison. The Supreme Court however said the rule applied to revenue transactions and not to capital transactions

In May 2007, Vodafone bought Hutchison Telecommunications International Ltd’s 66.98% stake in Indian telecom company Hutch Essar Ltd for $11.2 billion (around Rs.52,300 Cr). Hutchison controlled its Indian telecom subsidiary through a Cayman Island company called CGP. CGP’s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm.

The government in June 2014 had appointed former chief justice of India R C Lahoti as arbitrator while Vodafone named Canadian trial lawyer Yves Fortier as its choice. The two had zeroed in on Abdulqawi Ahmed Yusuf of ICJ as the presiding arbitrator. However, Lahoti recused himself from the case in May 2015 and a month later, Yusuf too declined to be part of the panel. Thereafter, India last year named Costa Rica- based lawyer Rodrigo Oreamuno to arbitrate on its behalf. But Oreamuno and Fortier have not been able to decide on a presiding arbitrator, prompting Vodafone to move ICJ.

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