Republic of India versus Vodafone Group Plc.

The writer explains the above titled case which India lost at the International Arbitration Tribunal and deals with
the legally thorny issue of retrospective financial legislation and its implications on business in general and
foreign investments in particular

Protection in respect of conviction for offences: No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the Act charged as an offence, nor be subjected to a penalty greater than which might have been inflicted under the law in force at the time of the commission of the offence reads Article 20 (1), part of Fundamental Rights enshrined in the Constitution of India.

The Vodafone Saga
Vodafone India is a duly incorporated telecom company in India, with its headquarters in Mumbai since 1994.
However it is an Indian subsidiary of the Vodafone International Holdings of United Kingdom (UK) which challenged the Government of India’s retrospective taxation law in the International Arbitration Tribunal at The Hague. In 2007, Vodafone acquired Hutchison Essar for $11 billion. The Indian Department of Taxation issued a notice for $2.2 billion as capital gains tax. Vodafone argued that since there was no transfer of any capital assets situated in India, the question of capital gains does not arise. Further, the deal was carried forward entirely outside of India where the Indian Tax Authority had no jurisdiction. In the ensuing deadlock, Vodafone entered into litigation.

Supreme Court Judgment, 2012
Vodafone challenged the verdict of the Bombay High Court which had upheld the position of the Indian Tax Authorities. Vodafone International, the appellant, held to its original stand, the business deal was struck offshore and that the demand for capital gains tax was unjustifiable. It challenged it in the Supreme Court of India. A three-judge bench, S.H. Kapadia, K.S. Radhakrishnan and Swatanter Kumar, delivered a unanimous judgment which was hailed as the landmark corporate judgment both in India and beyond. Briefly, the facts of the case are as follows: Vodafone India’s parent company Vodafone International Holdings is a firm domiciled in the Netherlands for tax purposes. Similarly, its other acquisition Hutchison Essar Ltd is resident of Cayman Islands. It does not consider Hutchison-Essar as resident in India for tax purposes since it is acquired by it, the parent body Vodafone International Holdings. The legal argument of the judgment enunciated that it is based on the principle that a body corporate is a separate entity – not physical person but legal person – other than those who manage its affairs and the shareholders. The court observed that “the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the above mentioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of the companies and other entities subject to income tax (Para 65).” It is well settled in law that the parent and its subsidiaries are distinct tax payers. Taxes are levied on profits made by each corporate entity. It is clear from the evidence provided that the concerned two companies conducted their business outside of India for tax purposes and no illegality is involved therein; they have no income or fiscal assets in India, and therefore no transfer of these assets has taken place. “Tax presence has to be viewed in the context of transaction in question and not with reference to an entirely unrelated transaction… Consequently, the demand of nearly Rs.12, 000 crores by way of capital gains tax would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed… (Para 188)”, the Court concluded. The judgment also embedded in it a time tested doctrine of ‘look at’ for the tax authorities which implied that, while investigating a case, one must bear a holistic perspective and examine the bigger picture and eschew narrow prejudice of imputing ulterior motives.

Income Tax Amendment Law, 2012
The Tax Authorities would have none of it. The aim was to recover taxes with interest and penalty, roughly amounting to Rs 20,000 crores. On 16 March 2012, under then Minister for Finance, late Pranab Mukherjee, an amendment to the Income Tax Act, 1962 was inserted which specified that income arising out of sale of shares or other interests in a company or entity had taken place outside India, and the value of the share or unit depended primarily assets in India is taxable. Further, it is to be effected retrospectively from the inception of the law – 1962! With that stroke of amended legislation, the above narrated landmark Judgment of the Apex Court became null and void. The Government of the day tried to convince itself, the opposition, the industry and the rest of the world by stating that it is trying to plug some loopholes and could dig out the unfair means used by the offshore companies. The furor within the country and the outrage in the global corporate world was one of shock and horror. That this contributed among other glaring decisions for the eventual fall of the Government, is common knowledge.

Republic of India versus Vodafone Group Plc
In April, 2014, Vodafone initiated international arbitration. After a delay on an agreed course of arbitration, the process commenced in 2016. In the meantime, Vodafone filed a second suit of international arbitration against which the Government of India appealed in the Delhi High Court, where it got overruled. It held that it is for the International Arbitration Tribunal to decide. Vodafone further embroiled the Government of India with the breach of two Bilateral Investment Treaties (BIT) United Kingdom and Netherlands, respectively. When the judgment was pronounced in The Hague on 25 September 2020 it was nothing different than what the Supreme Court of India had
so eloquently adjudicated. India was also charged for breaching the international trade treaties. In addition, fines were imposed and costs of litigation were added.

India’s Legal Standing in the Comity Of Nations
In the post-independence era, the legal admiration for India began with the highest esteem for the formation of the
Constitution of India. It was followed by the global citation of Indian case law. Experts have assessed that India has been losing its sheen in this field. It received a mortal blow with the above cited retrospective or retroactive taxation law. Consequently investors are more than wary about the India Inc’s credibility to depend upon a stable tax regime and have announced plans to approach International Court of Law.

Implications for International Trade and Commerce
To expect returns on investments and increase value for the shareholders is the fundamental object of running business corporations. Presently, the Government of India is trying to convince scores of countries on individual basis that it will draw its policies carefully and will do its utmost to facilitate ‘ease of doing business’. However, economists, policy makers and legal minds are of the view that unless India buries the ghost of retrospective taxation law it cannot dream about multi-trillion dollar economy.

Retrospective Law and the Dilemma of Ethical Business
It is a given that in criminal justice, retrospective laws are ipso facto illegal and ultra vires as is clearly amplified by Article 20 (1) of the Constitution of India, as stated above at outset. However, in civil matters, for instance taxation, such an imperative expressly does not exist, but if any such attempt is made, it goes against the ethical practice of law. For the legal system is built on the principle of prospective law and never its opposite. The ethical dilemma generated by a retrospective legislation is as follows:
On the one hand, an individual or a legal entity has the absolute right to enjoy the benefits of their property, trade and their proceeds, and on the other hand the State has every right to take its due through taxation.

(The columnist is a writer with Oxford University Press and a published author. Email:

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