India High Court Shifts Vodafone Tax Spat to International Panel (1)

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By Siri Bulusu

An Indian high court has opened the door for Vodafone to dispute a $1.8 billion tax bill before an international tribunal—a move that will test India’s domestic tax laws against bilateral investment treaties.

The High Court of New Delhi passed a ruling May 7 stating that the court won’t intervene and block Vodafone’s attempt at simultaneously invoking international arbitration proceedings under both the U.K.-India and Netherlands-India investment treaties, since that power is reserved only for “very compelling” cases.

The high court’s landmark dismissal of the Vodafone case could embolden other multinationals to seek international arbitration under investment treaties to settle ongoing tax demands, practitioners said. The development is an escalation of a years-long dispute between the telecommunications company and the India tax authority.

“While the court said they reserve their jurisdiction over such matters for a compelling case, they gave no examples—and any other company facing a tax dispute could take benefit from that language,” Chetan Daga, director of chartered accounting firm B.K. Khare & Co., told Bloomberg Tax May 8.

The outcome of the proceedings may not necessarily set a legal precedent like a court decision, because the panel operates more like a negotiation, Daga said. Still, the outcome of the Vodafone case will likely impact the way other companies approach tax remedies under various treaties once they’ve exhausted domestic tax remedies.

“Vodafone fought this case all the way to the Supreme Court—there is no domestic law left to them so they’re forcing India to recognize that this is a matter that should be heard before the arbitration panel,” Daga said.

The Dispute

Vodafone Group Plc’s tax dispute with the Indian government dates to 2007 when Vodafone acquired India-based telecommunications company Hutchison Essar Ltd. through a Cayman-Islands based subsidiary. Indian tax authorities claimed the underlying assets of the shares transferred derived value in India, and slapped Vodafone with a 120 billion rupee ($1.8 billion) tax bill.

Vodafone disputed the bill up to India’s Supreme Court, which ruled in January 2012 that Vodafone wasn’t liable to pay the tax. But shortly after the decision, India’s parliament inserted a new section into Indian tax law giving tax authorities the power to levy taxes on indirect transfers of shares retrospectively—thus renewing the tax demand.

“The tax case has now been brought under the scope of the bilateral tax treaties which take precedent over domestic tax law, so the government will be bound by the panel’s decision,” Pallav Narang, a partner at the chartered accounting firm CNK RK & Co., told Bloomberg Tax May 8.

Next Steps

The Indian government will continue to argue that the international arbitration panel doesn’t have the jurisdiction to determine what taxes a country can levy on private companies operating in its jurisdiction, practitioners said.

Practitioners say the Indian government’s argument over its sovereignty could hold weight with the international panel, but added that the retrospective nature of the tax may hurt the government’s position in this case, and open the door for other companies.

“Depending on the outcome of this case, other companies facing grief from Indian tax officers could approach arbitration under treaties—the government cannot ignore their treaties,” Narang said.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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