Vodafone wins crucial victory in ₹20,000 cr tax arbitration case against Indian govt

Vodafone won a crucial victory in a years-long tax dispute with the Indian government, a development that could potentially save the UK wireless carrier almost ₹20,000 cr ($3 billion almost)

Shares of Vodafone Idea Ltd., Vodafone’s money-losing India unit, jumped 13% in Mumbai on Friday after CNBC-TV18 reported the ruling, their biggest gain since September 3. (REUTERS)

Vodafone won a crucial victory in a years-long tax dispute with the Indian government, a development that could potentially save the UK wireless carrier almost ₹20,000 crores ($3 billion).

An international arbitration tribunal ruled that India's efforts to claim ₹20,000 crores ($2.7 billion) in past taxes were in breach of fair treatment under the bilateral investment protection pact between the south Asian nation and the Netherlands, according to a lawyer representing the company in the case. The tribunal has also asked India to halt its efforts to claim the tax dues. India can appeal.

Shares of Vodafone Idea Ltd., Vodafone's money-losing India unit, jumped 13% in Mumbai on Friday after CNBC-TV18 reported the ruling, their biggest gain since September 3.

The ruling may ease the burden on Vodafone's India venture at a critical time when it is already facing a demand for billions of dollars in back-fees, which India's Supreme Court ordered it to pay last October in a separate case. The joint venture between Vodafone and billionaire Kumar Mangalam Birla's conglomerate has been weighed down by a $7.8 billion bill from the government -- biggest among peers -- posting eight straight quarterly losses and holding over $14 billion of debt.

‘Got Justice'

“Vodafone has finally got justice,” said Anuradha Dutt, managing partner of DMD Advocates, a New Delhi-based firm which argued for Vodafone. “They have held that the government trying to recover from Vodafone the tax, interest, and penalty, is unfair and it breaches the fair and equitable standards laid down by international law.”

A Vodafone spokesman in London confirmed that the investment treaty tribunal found in the company's favor. “This was a unanimous decision, including India's appointed arbitrator Mr Rodrigo Oreamuno,” the spokesman said in an email. “The tribunal held that any attempt by India to enforce the tax demand would be a violation of India's international law obligations.”

Vodafone Group shares traded 0.2% lower in London. The U.K.-based global telecommunications group wrote off the carrying value of its share in the joint-venture last year, and Chief Executive Officer Nick Read said he would not inject more equity into the company.

India's finance ministry said in a statement the government “will be studying the award and all its aspects carefully in consultation with our counsels” after which it will decide on further course of action “including legal remedies before appropriate fora.”

The ruling on Friday marks the latest twist in over a decade-long tax dispute that started when Vodafone entered India by acquiring Hutchison Whampoa's Indian operations in 2007 and was slapped with the tax bill.

Retrospective Rule Tweak

Vodafone disputed that this tax demand and the country's Supreme Court agreed that no local law supported the levy of this tax. But then-Finance Minister Pranab Mukherjee amended the tax rules to apply retrospectively, triggering a legal battle that ended up in the Hague arbitration court.

The Indian government could now either appeal the latest ruling in the Singapore High Court, or tweak the tax law to make it prospective and not retrospective, Vodafone's lawyer Dutt said. “These are the two choices that come to my mind.”

India's telecommunications sector, with a billion-plus potential phone users, once attracted global wireless carriers, and was teeming with a dozen operators until three years ago. Relentless tariff wars, high airwaves fees, frequent policy flip-flops and endless tax demands have driven most of India's mobile-phone operators aground.

There was no law initially that created a tax liability on an outside entity buying Indian assets, according to Bhupendra Tiwary, an analyst at Mumbai-based ICICI Securities Ltd.

The Indian government “made changes after the Vodafone deal had happened,”said Tiwary. “India was arm-twisting the company to pay taxes. So Vodafone winning this case was expected. It was a matter of when and not if.”