Unwrapping the Conundrum: The Vodafone-India Tax Saga

[By Urja Dhapre and Chetan Saxena]

The authors are students at the Institute of Law Nirma University.


In an attempt to draw things to a close, the Permanent Court of Arbitration [PCA] has passed an award against India’s Income Tax Department, upholding Vodafone International Holding BV’s [VIH] claims to not pay the tax liability for a whopping $2.2 billion. The award holds the Indian Tax Department to be in violation of Article 4(1) of the Bilateral Investment Treaty [BIT] between India and the Netherland which elucidates the principle of fair and equitable treatment to the investors.

VIH’s saga of a tax dispute in India dates back to the year 2007 wherein a tax liability was imposed on VIH by India’s Tax Department alleging VIH to have concluded its acquisition with Caymanian-based CGP Investments from Hutchison Telecommunications International Ltd [HTIL] based in Hong Kong as a colorable device to ultimately get a controlling interest in Hutchison Essar Ltd [HEL], an Indian company whose control was held by CGP Investments.

While the Bombay High Court [BHC] ruled in favor of the tax department, the Supreme Court [SC] overturned the BHC’s judgment by clarifying that the transaction in contention was not related to the transfer of an asset but rather the transfer of a share.

VIH’s resort to International arbitration rests on the grounds of a retrospective amendment in the Income Tax Act, 1961 [IT Act]by the government in 2012, such that it overturned the Supreme Court of India’s [SC] judgment, making VIH labile for tax dues.

Offshore Indirect Transfers and their Taxation Aspects

Offshore indirect transfers [‘OITs’] like the one of VIH-Hutch, are one such category of transactions that are viewed to have built to abuse the tax regulations of a country, such that the ownership and effective control of an asset is transferred without replacing its legal owner.

The underlying asset does not change hands, so there is formally no capital gain directly realized. However, gains are made out of such underlying assets even though the primary ownership remains the same. The chargeability of such gains is thus contested due to its uncertainty in interpreting OITs and their taxation with no standard regulations set across the globe.

In June 2020, the Platform for Collaboration on Tax [PCT] came up with a report concluding that location countries shall have the right tax OIT’s. However, an important deliberation was of the inclusion of specific provisions taxing the OIT’s. While the report transcripts the view that OITs shall be taxable where the underlying asset lies, it refrains from the applicability of such taxes retrospectively.

The Retrospective Amendment and its Validity

The amendment brought forward by the Government of India overturning the decision of the SC disrupts the entire affixed jurisprudence of tax statutes in India. The aspect of retrospectively amending tax clauses for the sole purposes of overturning the judgment has been questioned and its condemnation has been widely unveiled through a catena of judgments.

In the case CIT v. NGC Networks (India) Pvt. Ltd., BHC applied the principle of lex non cogit ad impossibilia (the law does not compel a man to do what he cannot possibly perform) with respect to the contested retrospective amendment of Explanation 6 to Section 9(1)(vi) of the IT Act. Moreover, the Indian Tax Authority [ITAT] in the case of Cairn India Ltd &Ors. v. Government of India (post the Vodafone ruling) had held that the assessee cannot be burdened with the levy of interest where it could not have visualized its tax liability at the time of the transaction, and tacitly lent credence to the view that the indirect transfer provisions were new and did not previously exist.

The approach of the SC with respect to retrospective amendments is also very unambiguous. In the case of Commissioner of IT, New Delhi v. Vatika Township Private Ltd the court observed that taxing principles should be construed in their strict interpretation, and ordinarily, a statute should not be held to have a retrospective effect. Anything contrary breaches the principles of natural justice along with it being violative of the right to carry trade under Article 19(1)(g) of the Constitution of India. Another bench of the SC, held on similar lines, clarifying “the Legislature cannot set at naught the judgments which have been pronounced by amending the law, not for the purpose of making corrections or removing anomalies but to bring in new provisions which did not exist earlier.”

Principle of Fair and Equitable Treatment and Offshore Indirect Transfer

The principle of fair and equitable treatment [FET] is one of the most accustomed provisions often found in Bilateral Investment Treaties [BITs], casting an obligation on the host countries to provide foreign investors with a fair and equitable treatment.

A lot of discussion has evolved to interpret the minimum standard of the FETs as to whether it is a self-contained standard, referring to general International Law which has to be interpreted in each case by the arbitrators or it should be linked to customary international minimum standard. To resist a blurred and ambiguous situation, the tribunals have analyzed five categories of elements to be encompassed to interpret this principle:

  1. Obligation of vigilance and protection,
  2. Due process including non-denial of justice and lack of arbitrariness,
  3. Transparency,
  4. Good faith – which could include transparency and lack of arbitrariness and
  5. Autonomous fairness elements.

Analyzing the tribunal’s decision to be against the fair and equitable principle accorded in Article 4(1) of the India-Netherlands BIT, the authors attempt to study in the light of international jurisprudence the approach that tribunals have undertaken in similar cases.

One such remarkable case is of the Occidental Exploration and Production Company [OEPC] initiating arbitral proceedings against Ecuador for violating the FET provision of their BIT. The Tribunal interpreted the FET standard to require the “stability of legal and business framework” to be met with the transaction. It concluded that the framework, under which the investment had been made and operated, was altered to a crucial extent by amending its tax law without providing any clarity about its meaning and extent.

Further, in another case of Toto Construzioni Generali S.p.A. v. Republic of Lebanon, the tribunal clarified that for the breach of FET to be proved the investor needs to establish that the changes in taxes or custom duties inflicted a drastic or discriminatory consequence.


While various other issues surround the taxability of OITs, the liability to pay taxes on account of gains through such OITs is not one of them. However, what concerns the assessee is the retrospective application of laws to craft a liability that never exists in reality. Vodafone being the victim of such application of law has finally found a way out to this by securing a win before the arbitral tribunal.

In the present case, the Government of India failed to provide fair and equitable treatment of VIH’s investment as required by the BIT. The same will hold water on the grounds of not providing VIH with consistency, transparency, due process, and arbitrariness.

Time and again tribunals have reiterated their position apropos any adverse alteration in the legal or business framework of the host country can breach the FET threshold concluding the investors’ legitimate expectations of predictability and stability when undermined.

By amending the provision of the IT Act retrospectively, India’s measures were taken in an unfair and discriminatory manner which constitutes a denial of justice to VIH and a violation of good faith principle under International law, which has been elaborated in Técnicas Medioambientales Tecmed, S.A. v. United Mexican States concluding the conduct of the host state to be unambiguous and transparent.

The unfair and discriminatory treatment can be portrayed by the fact that no such drastic measure was taken by India on similar footnotes before the exorbitant amount of $2.2 billion was taxed on VIH due to its offshore indirect transfer.

Moreover, even after diverting from the standard of FET interpreted by the tribunals, the scope of FET can also be unraveled according to its ordinary meaning enshrined in Article 31(1) of the Vienna Convention on the Law of Treaties, or from the good faith principle, the scope of which can be assumed under the said BIT.


Even after 8 years, the saga of taxing VIH retrospectively still continues. It may look like Vodafone has had the last laugh with the PCA award but things are far from over. Multiple sources have cited the possibility of the Government of India challenging the validity of the award. Such a challenge would majorly involve the violation of public policy envisaged under the Indian Arbitration and Conciliation Act, 1996.

Additionally, the Ministry of Finance released a statement that India would no longer have arbitration on taxation matters under its model BITs, further dampening India’s already clouded goals on foreign investment. The measure can very well be attributed to the two major issues: Firstly, more than 70% of the Indian Tax department’s claims get rejected, and secondly, India, till now has lost 80% of its BIT arbitration claims.

Keeping in mind that multinational entities have a legitimate right to lay out a corporate structure through OITs, it is high time for India to bring certainty in its tax policies to gain more foreign investments and effectively tax capital gains from OITs, progressively.

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