Rs 85 crore — this would be the Centre’s liability should it decide to not appeal against Friday’s ruling of the Permanent Court of Arbitration in the Rs 22,100-crore tax dispute with Vodafone Group Plc. The arbitration tribunal ruled in favour of Vodafone Group against India’s retrospective demand of capital gains tax. Of the Rs 85-crore outgo, Rs 45 crore will be towards the tax collected from Vodafone so far and Rs 40 crore, or 4.3 million pound sterling, towards the administrative cost charged by the tribunal.
According to Finance Ministry sources, since Vodafone had not paid the initial tax demand of Rs 7,900 crore and interest and penalty on it, the question of India paying back Rs 22,100 crore did not arise. Further, the tribunal has not accepted the claim of Vodafone for award of damages, sources added.
The issues, however, are expected to crop up for Indian government at another level, with the possibility of other pending cases under arbitration following suit as the Vodafone case, experts said. “Vodafone’s win in the arbitration against the government in the retrospective taxation of indirect transfers is very significant as it may cause other similarly placed companies to seek arbitral reliefs. While many bilateral investment treaties have been scrapped by Government or modified not to cover taxation within their ambit, this space is likely to witness further action,” Kumarmanglam Vijay, Partner, J. Sagar Associates said.
They also said that if the Government of India does not decide to implement the ruling, Vodafone Plc can seek remedial action for implementation by approaching Indian courts. “The Government of India will need to take a view on it, whether to accept it or not. Or to seek some sort of review. And, if the government does not decide to implement it, then Vodafone can seek remedy in Indian courts,” former Central Board of Direct Taxes (CBDT) Member Akhilesh Ranjan said.
India is bogged up in several international arbitration cases including some on account of retrospective tax claims against companies such as Cairn Energy. The company is seeking full restitution for its losses totalling over $1.4 billion resulting from India’s expropriation of its investments in India in 2014. The Centre also has a track record for challenging arbitration rulings. The government had appealed against the $476-million arbitration awarded to Vedanta and Videocon in 2011, but this was turned down by the Supreme Court. Arbitration proceedings had resulted in a $476-million award to Vedanta and Videocon pertaining to the Ravva oil and gas fields that they had jointly developed in the 2000s. As per the Malaysian Arbitration Act, 2005, an award (the decision of the arbitration) was pronounced in favour of the respondents on January, 2011.
In July 2014, presenting the Budget, then Finance Minister Arun Jaitley had said that the NDA government will not retrospectively create a fresh tax liability and that all fresh cases arising out of 2012 retrospective amendments will be scrutinised by a high-level committee before any action is initiated. “…consequent upon certain retrospective amendments to the Income Tax Act 1961, undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion,” Jaitley had said.
The government’s stated intent has been that investment treaties should not cover tax matters, one of the reasons for objection to the arbitration in this case since it was covered under the Bilateral Investment Treaty (BIT) was unacceptable to it in this case was because it was and not the tax treaty. Since then, the government has modified nearly 60 such treaties to exclude taxation matters.
“BITs entered by India in the past were wide enough to cover tax issues. This was something which India was not comfortable with and therefore India came out with a model Bilateral Investment Treaty in 2015 which left out tax and most favored nation clause among various other changes…However, the new model BITs have found few takers with some countries like Bangladesh entering into the BITs based on the 2015 model. Going forward, this decision will not result in more companies opting for this approach as most BITs have already been terminated by India,” Amit Maheshwari, partner, AKM Global said.
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