Vodafone Arbitration Case

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About Vodafone

Vodafone is a British multinational-telecommunication company, headquartered in London, Britain. It’s main service vicinities are Asia, Europe, Africa, and Oceania. It was one of the leading telecommunication companies with a 45% stake in the number of mobile customers in 2018.

The evolution of Vodafone started in 1982 with the establishment of the Racal Strategic Radio Ltd. (a subsidiary of Racal Electronics). It is the UK’s largest military radio technology manufacturer, which formed a joint venture with Millicom called ‘Racal’. Also, it won the license for building Britain’s cellular telephone network. It later evolved into the present Vodafone.

VODAFONE’S JOURNEY IN INDIA

After globalization, India’s telecommunication Compound Annual Growth Rate (CAGR) was increasing rapidly. Vodafone saw it as an opportunity to expand. Following this, Vodafone entered India with a 10% stake in Bharti Televentures Limited (BTVL) and Hutchison Essar in 2007. Vodafone merged with Idea in 2018 as ‘Vodafone Idea Limited’.

But in this article, we will talk about Vodafone – Hutchison Essar joint venture.

Vodafone acquired 67% stake in India telecom company Hutchison Essar Ltd, for $11 billion in 2007.

Now before moving further, we must get some facts clear.

  1. Hutchison Telecommunication International Ltd (HTIL) is a Hong Kong-based conglomerate company.
  2. Hutchison Telecommunication International Ltd owns CGP Investment Holding Ltd.
  3. This company is based in Cayman Island.
  4. After globalization, Hutchison Telecommunication International Ltd. formed a joint venture with the Max group as Hutchison Max telecom LTD (HMTL). After this venture, the company covered major licensed areas for business in India.
  5. In 2005, Hutchison partnered with the Essar group to cover the remaining area. It grew its business in the largest wireless market in India.
  6. CGP Investment Holding Ltd. had 67% holding in Hutchison Essar.
  7. Vodafone International Holdings, Netherlands, bought the shares of CGP Investment Holding Ltd. from Hutchison, Hong Kong.
  8. In February 2007, Hutchison Telecom announced that it had entered into a binding agreement with a subsidiary of Vodafone Group Plc to sell its 67% direct and indirect equity and loan interests in Hutchison Essar Limited for total cash consideration (before costs, expenses, and interests) of approximately $11.1 billion – Wikipedia
  9. This deal occurred overseas as; Vodafone’s Netherlands subsidiary acquired Hutchison Telecommunication International Ltd.’s stake in Hutchison Essar in Cayman Island. This way it entered in Indian Market.

WHY CAYMAN ISLAND?

You must be wondering why did Vodafone went to such a great extent when it could just directly buy Hutchison Essar in India itself?

It is because places like Mauritius, Cayman island and Bahamas are tax haven countries.

WHAT IS TAX HAVEN?

A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens also share limited or no financial information with foreign tax authorities. You don’t have to be a resident to avail the benefits of their tax policies.

  • Tax havens provide the advantage of little or no tax liability.
  • Offshore countries with little or no tax liabilities for foreign individuals and businesses are generally some of the most popular tax havens.
  • Investors and businesses may be able to lower their taxes by taking advantage of tax-advantaged opportunities offered by tax havens however, entities should ensure they comply with all relevant tax laws.

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About the case

Vodafone got conflicted with Indian tax authorities on the latter’s $2.5 billion tax claim. According to tax authorities, Vodafone was liable to pay tax in India as it acquired assets of an Indian company. But the company claimed that the deal was made offshore. A subsidiary of Hutchison registered in the Cayman Islands, held the parent’s stake in Hutchison Essar. Vodafone’s Netherlands arm Vodafone International Holdings acquired Hutchison’s stake in Essar.

However, the Indian supreme court passed the judgment in favor of Vodafone. The Income Tax authority didn’t have any right to levy a tax on their deal. Instead of accepting the court’s verdict, the Government of India passed a law that brought a retrospective change in law-making the offshore deals taxable in India.

Outcomes of the Application of the New Law

  • Section 9 includes indirect transfers.
  • “Property” includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever – Section 2(14)
  • Section 2(47), “transfer” includes the transfer of controlling interest of an Indian company by way of transfer of shares of foreign company.
  • “Situs of shares” of a company incorporated outside India shall be deemed to be in India if the share derives, directly or indirectly, its value substantially from the assets located in India.

This law was bad news for foreign investments in India. Many investors decided to extract their investments and potential investors thought twice before investing in Indian companies. However, after some time the government realized its mistake and decided to amend the law. Many promises were made on this front, but the actions weren’t taken up till recently in 2014 when the Modi government came into power.

Though Vodafone still argued the law. This was rather unusual because the supreme court is the highest decision-making authority and one rarely goes against its verdicts. But Vodafone had a very strong argument and it fought on the bases of India – Netherlands bilateral Investment Treaty (BIT).

“The India-Netherlands BIT in its Article 4.1 provides that the investors shall at all times be accorded fair and equitable treatment, which includes an obligation to ensure a stable and predictable regulatory environment”.

Both Vodafone and the Indian tax department fought in court for a long time but at last, the ruling holds Indian tax authorities in breach of the fair treatment doctrine (FTD). The permanent court in Hauge, Netherland ruled in the conduct that the Indian income tax department is in breach of its affair and equitable treatment.

Permanent Court of Arbitration

“The Permanent Court of Arbitration (PCA) is an intergovernmental organization located in The Hague, Netherlands. It is not a court in the traditional sense but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.” – Wikipedia

This is a huge win for Vodafone and its investors. Earlier, many MNCs and cooperatives have been talking about the difficulties they have been facing in doing their business in India due to frequent rules changing and also an inhabitable taxing environment. But this win has them set in ease.

There have been dozens of such tax disputes cases for example, Cairn Energy and Vedanta deal. After Vodafone win in this arbitration case many other companies also got to see a ray of hope. The government has also shown its concern to not repeat its mistake again. It is working towards changing the law to protect the rights of foreign investors by offering relief from possible policy.

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14 thoughts on “Vodafone Arbitration Case”

  1. Priyanka knows her subject and is very astute, honest and diligent writer, we need unbiased and authentic reporting, which she is doing. Kudos

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