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Vodafone and India: A Review

Vodafone and India: A Review

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Published by: barandbench on Sep 25, 2012
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 This report is the first in a series detailing Indian involvement with international investmentlaw, prepared by the Student Initiative to Promote Legal Awareness, National Law School of India University, Bangalore.R
 AAG
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 ADAVA
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S
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 ANTOSH
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D
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 A
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VODAFONE AND INDIA
A REVIEW OF CLAIMS IN INVESTMENTARBITRATION
 
 
1 
VODAFONE AND INDIA
A REVIEW OF CLAIMS IN INVESTMENTARBITRATION
The Vodafone Group’s investment in India has been shrouded with uncertainty. Starting in 2008, the IndianGovernment sought to tax Vodafone’s Share Purchase Agreement with Hutchinson Telecommunic
ationsInternational Limited for the purchase of the singular shareholding of CGP Investments, a Mauritian entity, whichheld a 66% interest in Hutchinson Essar Limited. The case aroused great interest amongst the legal and businesscommunities alike, not only in terms of its legal and commercial significance, but also the astronomical figure inquestion: Rs. 12,000 Crores. With the Bombay High Court ruling in favour of the Government, the Indian
Supreme Court’s subsequent decision relieving Vodafone from t
ax liability seemed to be the final word in aprotracted legal battle.The tale, however, had just begun. Soon after the Supreme Court judgment, Finance Minister Pranab Mukherjeemooted a retrospective amendment to Section 2(47) of the Income Tax Act, 1961. As it stood, the amendmentsought to tax the Share Purchase Agreement. Despite lobbying from various multinational corporations, tradinggroups and sovereigns and repeated attempts by Vodafone itself, the Finance Bill was enacted into law.
1
Throughthis, calls for stability and predictability in the taxation regime (a sentiment expressed by the Supreme Court itself)and the investment environment were ignored. Fashioned as a clarification to the existing legal regime, theamendment effectively nullified the decision of the Supreme Court and cleared the path for a new tax bill.In the months following the Finance Act, the debate has raged on
 – 
concerning the policy implications of theamendment, its effect on India as an investment destination and so on. Indeed, whether the actions of the IndianGovernment were prudent is a vital question in the larger discussion on economic policies and incentives. In fact,
1
 
Section 3 of the Finance Act, 2012, amends Section 2 of the Income Tax as follows: “in clause (
47), the Explanation shall benumbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted andshall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:
 — 
 
Explanation 2.
 — 
For the
removal of doubts, it is hereby clarified that “transfer” includes and s
hall be deemed to have always included disposing of orparting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly orindirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India oroutside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependentupon or flowing from the transfer of a share or shares of a company registered
or incorporated outside India …”
 
 
 
2 
the Finance Minister also sought to clarify motives behind the amendment, amidst allegations of discriminationagainst Vodafone. However, the harm was done.Faced with the prospect of retrospective taxation, Vodafone sought to exercise its rights under the India-Netherlands Bilateral Investment Treaty. It served the Indian Government with a Notice of Dispute under the
Treaty, threatening international arbitration if the amendment was not “
abandon[ed] or suitably amend[ed]
”.
2
 
Given India’s recent tryst with investment arbitration with the
White Industries
award, and a similar threat fromSistema concerning the cancellation of 2G licenses, the Vodafone case presents another example of Indianengagement with international investment law. Attracting greater investment comes with the responsibility of treating foreign investors equitably, and a risk of external scrutiny of state actions. Indeed, the media attentionsurrounding the Vodafone saga, coupled with the amount at stake, has transformed the political landscape as well.All eyes are now on the Calcutta High Court, as it deliberates upon the validity of the retrospective amendment.
3
 
Political implications aside, the Vodafone case presents several intriguing legal issues. The lack of clarity on India’s
obligations under the Bilateral Investment Treaty has led to great confusion in legal and business circles. This reportoperates to fill that void by providing a detailed account of possible disputes in the arbitration. We do not seek toargue in favour of either party, or pre-judge the situation, but rather, outline the legal issues involved in order tobetter understand the contours of the possible arbitration and allow all stakeholders to make informed decisions. Indoing so, we hope that this document interests and assists students, lawyers and businesses alike, and serves as aplatform for further discussion.Several strands of thought in this document emanate from the discussions at the International ArbitrationConference conducted by the National Law School of India University, Bangalore in March, 2012. We benefitedgreatly from the views expressed by the participants and thank them for their engaging discussions. We would alsolike to thank Dr. Sreenivasa Rao Pemmaraju, Special Advisor in the office of the Attorney-General, State of Qatarand former Chairman of the International Law Commission, Mr. Shreyas Jayasimha, Partner at AZB & Partners inBangalore and Mr. Promod Nair, Partner at J. Sagar Associates in Bangalore for their comments on earlier drafts of this report, and for their continued assistance. We would also like to thank Ms. Jahnavi Sindhu for her help in the
2
See Press Release Concerning Notice of Dispute served by Vodafone International Holdings B.V. to the Indian Government,Annexure III.
3
 
McLeod Russel, First To Challenge India’s Retrospective Tax Laws
, The Economic Times, June 13, 2012, available at<http://articles.economictimes.indiatimes.com/20120613/news/32215747_1_mcleod-russel-mcleod-russel-tax-laws>(last accessed on 22
nd
July, 2012).

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