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This article is written by S A Rishikesh, from the Institute of Legal Studies, Shri Ramswaroop Memorial University, Lucknow. This article provides an insight into the infamous ‘retrospective taxation case.’ 


The entire issue revolves around the decision of the Ministry of Finance of India, applying a tax law retrospectively to circumvent the decision of the Supreme Court demanding INR 22,500 crores from Vodafone as capital gains and withholding tax. Immediately after which, Vodafone took this case to the Permanent Court of Arbitration in Hague. The Court unanimously ruled in  the favour of Vodafone holding the tax demand of the Indian government unfair and ‘in breach of the guarantee of fair and equitable treatment.’ The Court even asked the government to pay compensation to Vodafone.


Vodafone Group Plc is a company based in the United Kingdom, the business that Vodafone does in India is taken care of by its subsidiary Vodafone International Holding BV. The subsidiary is based in the Netherlands. Similarly, Hutchison Telecommunications International Limited (HTIL) company is based in Hong Kong. It provided telecommunication services to countries like Indonesia, Sri Lanka and India but does not operate directly. It also operates through its subsidiaries like CGP Investments Holdings Ltd. based in Cayman Island. CGP investment is fully owned by HTIL. 

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The dispute began when Hutchison Telecommunication International Limited (HTIL) decided to exit the Indian markets. They owned 67% stakes in the Hutchison Essar Limited based in India. Vodafone offered to buy a 67% stake of HTIL for US dollars 11.1 billion. Just to sum up, the deal took place between the companies based in Netherland and Cayman Island. The deal took place in Cayman Island and the assets that were transferred were of an Indian company. Hutchison Essar Limited (Indian Company) became Vodafone Essar Limited.

The deal was completed in May 2007, the Income Tax Department of India was not very happy with the deal and initiated an investigation against Vodafone in September 2007. On October 30, 2009, Income Tax Department served notice to Vodafone International Holdings BV asking for INR 7,900 crores as capital gains and withholding tax under Sections 201 and 201(1A) of the Income Tax Act,1961. The contention of the Indian authorities was very simple: the sale involved an Indian asset so any gain made in this transaction is taxable in India. Vodafone however, did not agree to this contention; they believed that the deal had taken place outside India and involved a Dutch company and a company based in Cayman Island and therefore they do not have to pay any tax to the Indian government.  

The Bombay High Court

The Income Tax Department continuously sent recovery notices to the Vodafone group and then the Vodafone group decided to seek refuge in the Bombay High Court. The Bombay High Court on September 8, 2010, ruled in the favour of the Income Tax Department of India and held, “the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian Company, by another foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to the municipal law of India, including the Indian Income-tax Act.” Bombay High Court even went further to term this case, a case of tax evasion and not a case of tax avoidance. 

The Supreme Court of India

Vodafone, not happy with the view taken by the High Court, knocked on the doors of the Supreme Court of India. The Supreme Court, on the other hand, took a totally different view as of the Bombay High Court and ruled in the favour of Vodafone. The Supreme Court in its January 20, 2012, ruling held that the transaction took place between the two non-resident entities and the contract was executed outside India. Consideration was also passed outside India. This transaction was in no way under the jurisdiction of the Indian tax authorities and therefore the order of asking tax was quashed. 

The Government of India filed a review petition against the judgement on February 17, 2012, but on March 20, 2012, the Supreme Court dismissed the review petition. This was a big setback for the Indian government and many believed that things would end here. 

An unprecedented move

The decision did not go well with the Indian government in the same year, the then Finance Minister Mr Pranab Mukherjee, the late ex-President of India did something quite unpredictable. To circumvent the judgement of the Supreme Court, he introduced a retrospective amendment in the Income Tax Act, 1961. This move was first announced in the budget speech of 2012-13. The retrospective change became effective from the year 1962 itself. This Finance Bill 2012 amended Section 9(1)(i) of the Income Tax Act,1961 and validated the tax that was imposed on Vodafone. The government said that the amendment was only a clarification to remove ambiguity that was already present and provide certainty on the other hand the move damaged the image of India as an investment destination.  

What is retrospective taxation

As the name suggests, retrospective means dealing with past events. In simple words, a retrospective law can criminalize an action that was legal when committed.  No law is perfect in itself and it contains its own flaws, retrospective taxation is a method to correct the same. It allows countries to pass a law on taxation from a time behind the date on which the law was passed. It is mostly used to correct anomalies in the policies that have in the past allowed the companies to take advantage of the loopholes present in that law.

India was not the first country to do something like this; the US, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have also retrospectively taxed the companies that took advantage of the loopholes present in their previous law. 

After the passing of the retrospective taxation law

After the passing of the new Act, the onus to settle the taxes was again on Vodafone. India faced very heavy backlash from investors abroad and in India itself. “The retrospective amendment that overturned the decision of the highest court of the land was badly drafted in its wide generalities and carried a perverse sense of vindictiveness,” said Nigam Nuggehalli, Dean of the School of Law at BML Munjal University. 

In January 2013, the Income Tax Department issued a fresh demand to the Vodafone group for INR 11,280 in crores. Retrospective taxes are not favoured globally and the international pressure forced the Indian government to settle the matter with Vodafone. The Tax Administration Reforms Commission (TARC) headed by Dr. Parthasarathi Shome was formed to look into the matter afresh. The commission report also suggested retrospective legislation should be avoided. But by 2014, with the next general elections being announced, all the efforts between the telecommunication and the finance ministry failed. The dispute being unsettled Vodafone looked for other legal methods and in the same order, it reached the Permanent Court of Arbitration in Hague, where it invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in the year 1995. 

What is the Bilateral Investment Treaty (BIT)

A bilateral investment treaty means an agreement between the governments of two or more states that contains terms and conditions for private investments by nationals and companies of one state into another state. The main aim of such treaties is that the government of the host state does not discriminate against foreign investments and protects the investments made by the investors of both countries.

India and the Netherlands signed a bilateral investment treaty on November 6, 1995, for the promotion and protection of investments in each other’s countries. India shares a similar treaty with the United Kingdom but Vodafone invoked the Netherlands treaty because the deal was between Vodafone International Holding BV based in the Netherlands and CGP Investments Holdings Ltd of Cayman island.

On September 22, 2016, the bilateral investment treaty between India and the Netherlands expired. 

Court of Arbitration (PCA)

The Permanent Court of Arbitration is an intergovernmental organisation that was established in the year 1899 it is located in Hague, Netherlands. It is the oldest universal mechanism to settle inter-state disputes. It should not be misled by the name, it is not a Court at least not in the same sense as the International Court of Justice. It is a permanent and administrative framework. There are no permanent judges and ad hoc administrative tribunals are set up for each dispute that comes to the Permanent Court of Arbitration. 

Vodafone International Holdings BV (The Netherlands) v. Government of India, (2016)

It was an investor-state dispute where the Court ruled in favour of the investor. The arbitration panel consisted of three members one of which was neutral and one each nominated by the party to the case. The decision was unanimously against India which means all the three members voted in favour of Vodafone. Even the panellist nominated by India Rodrigo Oreamuno voted against India and found no merit in India’s case.

The reason why the decision went in the favour of Vodafone was the violation of the bilateral investment treaty and the United Nations Commission on International Trade Law (UNCITRAL). Article 9(1) of the BIT says that “any dispute between an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party shall as far as possible be settled amicably through negotiations between the parties to the dispute”. Article 3(5) of the Arbitration Rules of UNCITRAL, says that the “constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal.

The judgment

The judgement was as follows:

  1. Claimant’s claim that the breach of a bilateral investment treaty between the Kingdom of the Netherlands and the Republic of India for promotion and protection of investments done at The Hague on November 6, 1995, is considered and the Tribunal has jurisdiction over it.
  2. There is a breach of Article 4(1) of the Bilateral Investment Treaty, by the Indian Government “the protection of the guarantee of fair and equitable treatment” is also violated.
  3. The Government of India is not entitled to claim any tax from Vodafone and should stop any effort to recover the same.
  4. The 60% cost of arbitration has to be paid by the government of India to the petitioners.

Cairn case

The Cairn case is very similar to the Vodafone case. Cairn India Holding company in India is an oil exploration company, they are the ones who found oil in Rajasthan, India’s biggest onshore find. It is a fully owned subsidiary of Cairn UK Holding which in turn is a subsidiary of Cairn Energy. 

In the Cairn case, Indian assets were transferred by Cairn Energy, the parent company to Cairn India Holding. In 2006, it acquired the entire share capital of Cairn India holding from Cairn UK Holdings the UK Holdings held 69% of Cairn India Holding. All are part of the same group. This transfer took place because Cairn India Holdings had to go for IPO in India. 

In 2011 Cairn Energy sold its shares to Vedanta Group. Again the income tax department intervened. This case also went to the Permanent Court of Arbitration and the decision came against India.

Latest development

The Ministry of Finance on August 5, 2021, introduced the Taxation Laws Amendment Bill, 2021 in Lok Sabha. This bill removes the contentious retrospective tax demands. According to this new bill any tax demanded for indirect transfer of Indian assets before May 2012, would be nullified on fulfilment of specific conditions. The conditions include withdrawal of pending litigation by such taxpayers and also a promise that no demand for damages will be made in future. The amendment also proposes to refund the taxes already paid by the concerned taxpayer, but without any interest. This move of the central government will benefit both Vodafone and Cairn Energy who were having a legal battle with the Government of India. 


With the decision of two arbitration cases against India. The government needs to accept the truth and rectify its mistake. When you are already in a pit there is no point in digging it further. The amendment of 2012, has seen three finance ministers from then but none of them tried to change it. 

A bad idea only gets worse with time. The amendment brought for Vodafone was used against Cairn. India lost both the cases in the Permanent Court of Arbitration and faced embarrassment. The current government has made public statements that India will not use this retrospective law but as long as the law is there, there will be a temptation to use it. With Nirmala Sitaraman introducing the new amendment bill in the retrospective taxation law, there is a hope that the image of India will improve in the international business community.


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