The tribunal, in the order, held that the Indian tax department was in breach of “fair and equitable treatment”
Vodafone PLC, on Friday, won a long-pending arbitration case against India's income tax department that demanded over 22,000 crore rupees on a retrospective basis.
"Vodafone confirms that the investment treaty tribunal found in Vodafone's favour. This was a unanimous decision, including India's appointed arbitrator Rodrigo Oreamuno," the UK-based company said in an official statement to Indian financial daily Mint.
The Permanent Court of Arbitration in The Hague held that any attempt by India to enforce the tax demand would be a violation of the country's international law obligations, the company added.
Following the judgment in Vodafone's favour, shares of the telco's Indian subsidiary Vodafone Idea Ltd rallied as the verdict improved prospects of investment by the promoter in India operations.
Shares of Vodafone Idea jumped by 13.6% to 10.36 rupees on the BSE, while the benchmark Sensex gained 2.28% at close on Friday.
Vodafone, however, in the past said it does not intend to make further equity investments in its Indian business.
"The verdict removes an overhang from Vodafone. Had the judgment gone against Vodafone, it would have had to pay $2 billion, which is equal to the telco's stake value in Vodafone Idea," said a telecom analyst while requesting anonymity.
Vodafone owns a 45.1% stake in Vodafone Idea, India's third largest mobile operator.
The tribunal ruled that the Indian tax department's demand from Vodafone is in breach of the bilateral investment treaty (BIT) between India and The Netherlands.
"The tribunal, in the order, held that the Indian tax department was in breach of the 'fair and equitable treatment' under BIT. Vodafone is entitled to 'fair and equitable' treatment under article 4(1) of the treaty," said a person with direct knowledge of the matter, requesting anonymity.
The income tax department has to pay $4 million in compensation to Vodafone, the person said, adding, "Any further challenge to the order, if the tax department decides to do so, has to go to the Singapore High Court."
Vodafone was represented by senior counsel Harish Salve and a team of DMD Advocates.
In a response to the judgment, the Centre said it will study the arbitration award and will "make a decision on further course of action" after legal and other consultations.
Another person aware of the matter said the Indian government has been asked to pay 4.3 million pounds – about 40 crore rupees – which is 60% of the tribunal's administrative cost; while the remaining 40% must be borne by Vodafone.
"Also, the government may have to refund the tax collected, which is about 45 crore rupees, only if it does not go for an appeal against the award. Therefore, the total outgo would be around 85 crore rupees only," said the person, requesting anonymity.
The dispute arose when the Indian government amended the Finance Act in 2012, where the power to retrospectively tax gains on transfers of shares was introduced.
Following the amendment, Vodafone was asked to pay a total of 22,100 crore rupees, in two tranches, in retrospective taxes on capital gains, including interest and penalty.
The amendment also overruled a Supreme Court judgment of 2012 in Vodafone's favour.
Vodafone then challenged India's amendment to the law, which allowed the country to retrospectively tax deals such as Vodafone Group's $10.9 billion acquisition of a 67% stake in Hutchison Essar in 2007.
"This victory of Vodafone was expected considering the widespread condemnation India faced on its decision to retrospectively amend the law to tax Vodafone, overruling a favourable judgment from the Supreme Court against the tax office," said Amit Maheshwari, partner, Ashok Maheshwary & Associates.
"It is a welcome order to raise investor confidence and will be seen as a strong rally point for Vodafone Idea's position in India," said Sameer Jain, founder and managing partner, PSL Advocates & Solicitors. Jain specialises in international arbitration.
However, it is yet to be seen whether India will accept the arbitration award or challenge the verdict, Jain added.