VODAFONE CASE AND ITS IMPACT ON CORPORATE TAXATION

Author: A.S.Sreekanth Babu, Assistant professor at Dr.Ambedkar Global Law Institute, Tirupati

The tax is levied on the income earned by either domestic or foreign companies known as corporate tax. The corporate tax will be charged as per the provisions of The Income Tax Act, 1961 in India. The income of the companies across the world will be registered under this. But the income receives or accrued from foreign companies in India is taxed under corporate taxation. In the case of Vodafone International Holdings B.V., Vs. Union of India which has come to the light deals with the transfer of shares of an Indian Company held by a former company to another foreign company. Transfer of Capital assets in India and Shareability of the transaction to tax under income tax act section 9(1) of the income tax act, 1961. What does this section 9(1) of income tax state? Section 9 of the Act provides the formal source rule which provides for taxing gains that arise from the transfer of capital assets that are in India. This blog presents the impact of the Vodafone case on corporate taxation.

The Story Of The Case

In May 2007, Vodafone had bought a 67% stake in Hutchison Whampoa for $11 billion. This included the mobile telephony business and other assets of Hutchison in India. In September that year, the Indian government for the first time boosted the demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison. Vodafone challenged this demand notice in the Bombay high court (by a bench presided by Justice D.Y. Chandrachud in 2010) but the judgment came in favour of the income tax department. Vodafone challenged the judgment of the Bombay high court in the Supreme court of India in the year 2012, the Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that did not have to pay any taxes for the stake purchase. In the same year, finance minister, late Pranab Mukherji proposed an amendment to the finance act, and the act was passed by Parliament which provides the income tax department power to retrospectively tax such deals. Hence, after that bill passes The onus to pay the taxes fell back on Vodafone in the same year Therefore, this case popularly knows as the " Retrospective taxation case ".

Meaning Of Retrospective Taxation

The combination of two words retrospective which means " past " which means taking effect from a date in the past and “tax” refers to a new or additional levy of tax on a specified transaction. Therefore, Retrospective tax means creating an extra charge or levy of tax by way of an amendment from an established date in the past.

After Passing The Retrospective Taxation Law

The bill passed and the onus to pay the taxes fell back on Vodafone. Firstly the amendment was criticized by worldwide investors who state that the amendment in law is " perverse " in nature. Then the Vodafone company invoked clause 9 of the bilateral investment treaty signed between India and the Netherlands in 1995 that indicating that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party” so as far as possible it will be resolved through negotiations.

The Bilateral Investment Treaty

The investment of companies is promoted and protected by the bilateral investment treaty in another's jurisdictions. Hence, both the countries would, under the Bilateral investment treaty, assure that companies present in each other’s jurisdictions would be “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”.

Declaration Of The Permanent Court Of Arbitration At The Hague

● The verdict was in favour of Vodafone since the taxation was in infringement of the "fair and equitable treatment" provision of Article 4 (1) of the India-Netherlands Bilateral Investment Treaty (BIT)" and the United Nations Commission on article 3 of International Trade Law (UNCITRAL) that says “constitution of the arbitral tribunal shall not be hindered by any controversy concerning the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal”.

● The tribunal also held that no taxes should be recovered from Vodafone since India had breached the terms of the agreement.

● It also ordered India to pay £4.3 million ($5.47 million) to the company as compensation for its legal costs.

The potential investors would desire to be thus careful while creating their cross-border unions and acquisitions transactions lest they are slapped with unnecessary and shocking tax liability from odd quarters in which they have not factored in negotiations and underestimate the opportunities of litigation.

Reference

1. Weinzierl M, 'FROM OPTIMAL TAX THEORY TO TAX POLICY: RETROSPECTIVE AND PROSPECTIVE VIEWS. By ROBIN BOADWAY.' (2013) 66 National Tax Journal

2. India l, 'Vodafone Case' (Legalservicesindia.com, 2021) <http://www.legalservicesindia.com/article/926/Vodafone-Case.html> accessed 7 June 2021

3. (2021) <https://www.internationallawoffice.com › ... Supreme Court issues landmark judgment in Vodafone case ...> accessed 7 June 2021

4. <indianexpress.com Retrospective taxation: the Vodafone case, and the Hague court ruling…> accessed 8 June 2021