Vodafone Group Plc has won yet another round in its 13-year-long battle with India’s tax authorities. On Friday, an international arbitration tribunal ruled that the Indian government’s efforts to claim more than Rs. 20,000 crore in tax (including related interest and penalties) from Vodafone using retrospective legislation was in clear breach of the ‘fair and equitable treatment’ protections afforded under Article 4(1) of the Bilateral Investment Treaty between India and the Netherlands. The ruling upholding the British multinational’s stand ought to end India’s protracted and often perverse pursuit of what at the very outset was a highly contentious claim. The dispute began in September 2007 when tax authorities served a demand on Vodafone International Holdings BV for tax that it said Vodafone’s Dutch unit ought to have withheld while acquiring the controlling stake in the erstwhile Hutchison Essar Ltd. from Hutchison Telecommunications International Ltd. Since the stake purchase transaction took place outside India between two overseas entities, Vodafone was emphatic from the start that it was not liable for any tax relating to the deal. Following a setback at the Bombay High Court, Vodafone presented its position to the Supreme Court, which ruled in its favour in 2012. In a move fraught with implications for all its international investment treaties, the government of the day, however, amended the tax legislation to give retrospective effect to its claims. This was the trigger for the U.K.-based company to seek arbitral recourse.
For Vodafone, the legal win is at best a pyrrhic victory. After having spent about $11 billion in 2007 for acquiring the 67% stake in Hutchison Essar, the telecom services provider has struggled with challenges that forced it, in November 2019, to write down the book value of its Indian holdings to zero. While the Indian operation has gained size and market share including through its merger with the erstwhile Idea Cellular — from, respectively, 44 million subscribers in 2007 to 305 million users, and 26.7% at the end of June — there have been continued losses in the face of intense competition and unviable tariffs. Add to the mix the substantial sum of money it owes the government in the form of adjusted gross revenue dues and the future fund requirements of a rapidly technologically evolving and highly capital intensive industry, Vodafone’s wariness to commit more equity to the Indian venture becomes understandable. The government must not seek to litigate the matter any further. The cost of doing otherwise will surely be bruisingly high, especially at a time when Prime Minister Narenda Modi spares no opportunity to woo foreign investment. Any failure to learn a salutary lesson from this loss would only serve to undermine overseas investors’ faith in India’s commitment to international treaties and the rule of law.