Vodafone Case on Retrospective Tax

Author : Gopika Sasi


The British telecom giant Vodafone Group plc, won a decade long-battle against the Indian Government over demand for Rs 22,100 crore in taxes using retrospective legislation. The arbitration case was against India’s tax demand stemming from a retrospective change in the nation’s tax law. [1]

In 2014, Vodafone International Holdings BV had initiated the proceedings, claiming that the tax liability imposed on it through retrospective amendments to the income tax law violated the principles of equitable and fair treatment protection as per the provision of Article 4(1) of the Bilateral Investment Treaty signed between India and Netherlands. [2]

The Permanent Court of Arbitration in Hague on Friday directed the Indian government to cease the tax demand, interest and penalty against the company after finding the merit in the telecom operator’s arguments. The Permanent Court of Arbitration also held that any failure to comply with the directions so directed by the Court will engage the government’s international responsibility.

The Court also directed the Indian Government to reimburse 50% of the fees paid by the company to the appointing authority and 60% of Vodafone’s legal costs.

With billionaire Kumar Mangalam Birla’s conglomerate, Vodafone merged its India operations but the combined entity Vodafone Idea Ltd was facing a $7.8-billion bill in past statutory dues.

Vodafone International Holding, in May 2007, bought a 67% stake in Hutchison Whampoa for $11 billion. This included mobile telephony business and various other assets of Hutchison in India.

But in September, the Indian Government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone.

This notice was challenged by the company and in January 2012, the Supreme Court handed down its judgment, holding that VIHBV’s interpretation of the Income Tax Act 1961 was correct, that the transaction in 2007 was not taxable in India, and thus, VIHBV had no obligation to withhold tax. [3]

Through the Finance Act 2012, the Government of India enacted a law to retrospectively tax any transfer or gain of shares in a non-Indian company, which derives substantial value from underlying Indian assets.

In January 2013, the telecom company Vodafone stated that it received a tax demand of Rs 14,200 crore, which included principal and interest but it did not include penalties.

The firm used BIT to challenge the demand in January 2014 in the Bombay High Court, which ruled in favor of the Income Tax Department. The decision of the Bombay High Court was challenged in the Supreme Court of India, where the Court ruled out that the interpretation of the Income Act 1961 made by the Vodafone group was correct and that they will not have to pay any tax for the stake purchaser.

The then Finance Minister, late Pranab Mukherjee avoided the Supreme Court decision by proposing an amendment in the Finance Act so as to give the Income Tax Department the power to retrospectively tax such deals.

The Act was passed by the Parliament the same year. The parties could not resolve the matter through a negotiation and Vodafone served and arbitration notice in April 2014.

The telecom company received a notice on February 12, 2016 of an outstanding tax demand of Rs 22,100 crore along with a threat to confiscate Indian assets if the tax is not paid.

The case become infamous as the ‘retrospective taxation case’. Anuradha Dutt, represented the telecom firm Vodafone along with senior lawyer Harish Salve and said that they got justice twice, first from the Supreme Court and now from the Permanent Court of Arbitration.

She also added that if she was the advisor to the Indian Government, she would have suggested that the government should bring an amendment.[5]

What is Permanent Court of Arbitration?

The Permanent Court of Arbitration is the oldest global institution for the settlement of international disputes that was established by treaty at the First Hague Peace Conference in 1899.

It has no sitting judges, like that of the International Court of Justice, the parties themselves select their arbitrators. The rules of arbitration procedure are outlined under Article 30-57 of the Hague Convention.

It provides administrative support in international arbitrations involving various combinations of states, international organizations, private parties and state entities.

It has experience in administering international arbitrations concerning disputes that arise out of treaties, including multilateral treaties, bilateral investment treaties and, other instruments.

The PCA’s newest set of procedural rules, which parties may use for the arbitration of disputes involving various combinations of states, international organizations, private parties and state entities are contained in the PCA Arbitration Rules 2012.

The PCA can also provide such services as logistical and technical support and financial administration, for travel arrangements, general secretarial and linguistic support and meetings and hearings. Its functions are not just limited to arbitration but also include providing support in various other forms of peaceful resolution of international disputes, including conciliation, mediation, and other forms of alternative dispute resolution.

What is the Bilateral Investment Treaty?

In 1995, India and the Netherlands had signed a BIT for protection and promotion of investment by companies of each country in the other’s jurisdiction. Under the BIT, the countries would ensure that companies present in each other’s jurisdictions would be “at all times it shall be accorded with fair and equitable treatment and shall enjoy full security and protection in the territory of one other”.

While the treaty was between the Netherlands and India, the telecom giant Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, and bought the Indian business operations of Hutchinson Tele communication International Ltd. This made it a transaction between an Indian firm and a Dutch firm. This Treaty between India and Netherland expired on September 2016.

What is retrospective taxation?

Just as the name suggests, retrospective taxation allows a country to pass a rule on taxing certain items, services or products and deals and charge companies from a time behind the date on which the law is passed.

This allows countries to use this route to correct any irregularity in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.

Many countries including Italy, the Netherlands, Canada, the US, the UK, Australia and Belgium apart from India have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law. [9]

What happened after India passed the retrospective taxation law?

The onus to pay the taxes fell back on Vodafone after the Parliament passed the amendment to the Finance Act in 2012. This was largely criticized by investors globally, who said that the change in law was perverse in nature.

India tried to settle the matter amicably with Vodafone, following international criticism but was unable to do so. After the new NDA government came into power, it said it would not make any fresh tax liabilities for companies using the retrospective taxation route. [10]

All attempts by the telecom and the Finance Ministry to settle the issue had failed by 2014. The Telecom Group then invoked Clause 9 of the Bilateral Investment Treaty which was signed between India and the Netherlands in 1995.

Flip side to Vodafone’s case of ‘retrospective’ taxation

India is a sovereign country and has the right to tax sales of Indian assets and capital deserves no special treatment. The government has got excessive disapproval and criticism for retaining India’s retrospective tax on asset transfers after it lost a case against Vodafone in the International Arbitration Court.

There are two main critiques to note. The first criticism was that the Government should never make tax changes with retrospective effect just like what late Pranab Mukherjee did in 2012 when he was Finance Minister, after the government lost the Vodafone case in our Supreme Court. 

The second criticism was that tax regimes must be stable so as to attract foreign or even domestic investment. Indian taxman has a tendency to harass the taxpayers and is well known to make large demands on unsubstantial grounds, public sympathy tends to be with the telecom firm, Vodafone.


The ruling made by the Permanent Court of Arbitration in favor of Vodafone indicates a setback for the country’s retrospective taxation policies. This also raises the possibility of other cases under arbitration being decided on similar principle. [12]

It seems that the Permanent Court of Arbitration has found the action of the Government of India’s following the 2012 Supreme Court order to be in violation of the equitable and fair treatment provision of Article 4 (1) of the India-Netherlands Bilateral Investment Treaty from the summary of the decision.

One of the main reason the Court of Arbitration ruled in favor of Vodafone is the infringement of Bilateral Investment Treaty and the United Nations Commission on International Trade Law (UNCITRAL).

When the Vodafone Group had initiated arbitration against India at the Court of Arbitration, in 2014 it had done so under Article 9 of the BIT. This was a unanimous decision while deciding this case and thus meaning that India’s appointed arbitrator also ruled in favor of Vodafone.[13]

[1] Aashish Aryan, Retrospective taxation: the Vodafone case, and The Hague court ruling, (October 1, 2020, 1:30), https://indianexpress.com/article/explained/retrospective-taxation-the-vodafone-case-and-the-hague-court-ruling-6613799/

[2] Article 4(1), Bilateral Investment Treaty.

[3] ET Bureau, Vodafone wins international arbitration against India in $2 billion tax dispute case, (October 1, 2020, 4:50), https://economictimes.indiatimes.com/industry/telecom/telecom-news/vodafone-wins-international-arbitration-against-india-in-2-billion-tax-dispute-case-report/articleshow/78314385.cms.

[4] Ami Shah, Voda Idea shares jump nearly 15% as Vodafone wins retro tax case in Hague, (October 1, 2020, 1:45), https://economictimes.indiatimes.com/markets/stocks/news/voda-idea-shares-jump-nearly-15-as-vodafone-wins-retro-tax-case-in-hague/articleshow/78314434.cms.

[5] id

[6] Permanent Court of Arbitration, (October 1, 2020, 6:30), https://pca-cpa.org/en/home/

[7] id

[8] Vodafone wins arbitration against India in retrospective tax case, (October 1, 2020, 3:20), https://www.moneycontrol.com/news/india/vodafone-wins-arbitration-against-india-in-retrospective-tax-case-5884651.html

[9] PCA decision on Retrospective Taxation by India, (October 1, 2020, 8:15), https://www.drishtiias.com/daily-updates/daily-news-analysis/pca-decision-on-retrospective-taxation-by-india

[10] FE Bureau, International arbitration: Vodafone wins Rs 22,000-crore retrospective case against tax department

 (October 1, 2020, 7:20), https://www.financialexpress.com/industry/international-arbitration-vodafone-wins-rs-22000-crore-retrospective-case-against-tax-department/2091905/

[11]R. Jagannathan, There’s a flip side to Vodafone’s case of ‘retrospective’ taxation, (October 1, 2020, 6:10), https://www.livemint.com/opinion/columns/there-s-a-flip-side-to-vodafone-s-case-of-retrospective-taxation-11601391962200.html

[12] Payaswini Upadhyay, Vodafone wins arbitration against India in Retrospective Tax case ( October 1, 2020, 5:25), https://www.bloombergquint.com/law-and-policy/vodafone-wins-investment-treaty-case-against-government-of-india.

[13] Id.