Vodafone India Tax Case Analysis | How Vodafone led to a retrospective amendment in Income Tax Act?

Scrapping off the retrospective amendment in Income Tax Act

The whole tussle around this started with the acquisition of Hutch by Vodafone. In this article, we’ll analyze the case study of Vodafone India’s tax conflict with the government,

The government has scrapped the retrospective amendment of 2012 in the Income Tax Act. The amendment made foreign entities liable to pay taxes on capital gains made indirectly from the assets located in India.

Hutchison’s Tax Avoidance Strategy

The story starts when a Hong Kong Company Hutchison’s Telecommunication opened its operations in India.  It acquired a 67% stake in Hutchison Essar Limited (HEL).

But here lies their tax planning move. They didn’t do it directly. Rather they opened another company called CGP Investments (Holding) Ltd a company in Cayman Island (a tax haven country). This company’s 100% stake was owned by Hutchison’s Telecommunication.

The conflict began in 2007 when Vodafone International Holdings (VIH), a Dutch Company wanted to expand its operation in India. For this, they bought 100% shares of CGP Investments (Holding) for USD 11.1 billion. Indirectly, they acquired a 67% stake in Hutchison Essar Limited (HEL), India. 

The Conflict between Vodafone and GOI

Here comes the conflict. According to the Income Tax Act, all income arising, whether directly or indirectly through the transfer of a capital asset situate in India is taxable. Therefore, Hutchison had to pay a tax of Rs.7000 Cr from the capital gain they made by selling its stake to Vodafone.

But when the tax department asked for taxes Hutchison denied it. It claimed that since CGP Investments (Holding) Ltd was situated in Cayman and not in India, they’re not liable to pay any taxes to the government of India.

Troubles for Vodafone

So now, Vodafone came under the scrutiny of the government of India. It should have made the payment after deducting TDS (Tax Deducted at Source), which it didn’t. Because Vodafone assumed that no tax would be levied on the transaction.

A show-cause notice was sent to Vodafone seeking clarification. The government asked why the tax was not retained on installments made to Hutchison in connection to the above transaction. The government said that the transfer in shares in CGP had an impact on the indirect transfer of assets in India.

So when this notice was sent in 2007 to Vodafone, Vodafone challenged it in the Bombay High Court.

The government won the case in Bombay High Court. Vodafone was asked to pay the taxes. Vodafone challenged this judgment of the High Court in Supreme Court where it won.

Vodafone’s Victory and GOI’s move

The Supreme Court gave the verdict in favor of Vodafone saying it is not required to pay tax as per the provisions of the Income Tax Act 1961.

After this, in 2012, the UPA government brought a retrospective amendment in the Income Tax Act, 1961. This amendment clarified that transactions such as Hutchison- Vodafone which includes the indirect transfer of assets in India are liable for tax.

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What is the Retrospective amendment?

Retrospective amendment meant that not only the law will be applicable from the date it is passed but also on the previous dates. 

With this retrospective amendment, Vodafone was now legally bound to pay taxes.

Since the law was amended, it could not be challenged in any court of India.

But Vodafone did not give in. In 2014, Vodafone approached the Permanent Court of Arbitration (PCA) at Hague, Netherlands. It contested that the retrospective amendment was in gross violation of the ‘fair and equitable treatment’ promised under the India- Netherlands Bilateral Investment Treaty.

Finally, in 2020, the PCA ruled in favor of Vodafone. PCA asked the Indian Government to stop pursuing them for taxes. Along with that, the government was asked to pay around Rs 40 Cr to Vodafone to cover their legal expenses.

Effects of the case

A similar case happened with Cairn Energy PLC in 2006. The conflict between Cairn Energy and the Indian government led to the government seizing assets of Cairn Energy to recover taxes. When PCA declared judgment in favor of Cairn Energy, the company started to freeze the assets of the Indian government located abroad to recover its money. 

And this has now ultimately led to the government scrapping off the retrospective amendment in the Income Tax Act to save further losses.