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NEW DELHI: Global telecom giant

Vodafone

has won a long-pending arbitration against India with

the Permanent Court of Arbitration

in

Hague

ruling that income tax authorities had violated provisions of the Bilateral Investment Treaty with the Netherlands by amending the law retrospectively to demand over Rs 20,000 crore in tax and penalties.

A tribunal ruled that the tax demand was in breach of “equitable and fair treatment standard” provided for under the Bilateral Investment Protection Agreement (BIPA). The original tax demand was under Rs 8,000 crore, but has increased to Rs 22,000 crore due to interest and penalty claimed by the tax department.

“Vodafone confirms that the investment treaty tribunal found in Vodafone’s favour. This was a unanimous decision, including India’s appointed arbitrator Mr Rodrigo Oreamuno. The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations,” the company said in a statement.

Describing it as the second win for Vodafone after the Supreme Court ruling in its favour,

Anuradha

Dutt, who represented the company, said: “We are hoping that the government implements the award as it will boost investor sentiment, which is critical for India today.”

The finance ministry said it would study the award and decide on the future course of action in consultation with its counsels. “After such consultations, the government will consider all options and take a decision on further course of action, including legal remedies, before appropriate fora,” it said in a statement.

While one option is to implement the award, the government can file an appeal in a Singapore court, but on limited grounds. In the past, the government had contended that an international tribunal did not have jurisdiction on an issue that had been legislated by Parliament.

“The government will have to take a view on whether to implement this award or not. If it does not, the matter will go to an Indian court. The award does tell the government not to pursue a tax demand, which may not be fully acceptable,” said Akhilesh Ranjan, a former member of the Central Board of Direct Taxes, who also headed the foreign tax wing.

The case — which relates to Vodafone’s acquisition of Hutchison Whampoa’s 67% controlling interest in its Indian operations — had faced massive criticism from global investors after then finance minister Pranab Mukherjee retrospectively amended the Income Tax Act to overturn the impact of a Supreme Court ruling. The apex court had dismissed the capital gains tax demand on the transaction involving two overseas entities with underlying assets in India.

Mukherjee’s action resulted in what has come to be described as “tax terrorism” as several companies faced similar demands. Although the government has promised to avoid such retrospective amendments, companies often point to the Vodafone case to argue about the lack of policy certainty in the country.

The government liability from the arbitration award is estimated to be restricted to around Rs 45-50 crore, which is 60% of the legal costs and fees.

Although a tribunal’s award does not set a precedent in other cases, the outcome of a similar dispute involving an over Rs 10,000 crore demand from Cairn Energy in “retrospective taxes” is being closely watched.

“The tax chickens of 2012 have come home to roost… The arbitration victory is a setback for the Indian government, the ramifications of which might be even worse as there are a number of other pending arbitrations on the same set of issues. Hopefully, the Indian government will learn from this arbitration that an attractive investment climate requires that they respect the rule of law rather than undermine it,” said

Nigam Nuggehalli

, dean of the School of Law at BML Munjal University.

On Friday, Vodafone shares closed 13.6% higher at Rs 10.36 on the Bombay Stock Exchange.

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