INTRODUCTION

The entire case centres on the Indian Ministry of Finance's move to retroactively apply a tax
statute in order to overturn the Supreme Court's order requiring Vodafone to pay INR 22,500
crores in capital gains and withholding tax. Following that, Vodafone filed a case with the
Permanent Court of Arbitration in The Hague. The Indian government's tax demand was
deemed unjust by the Court, which unanimously decided in Vodafone's favour, and as "in
contravention of the provision of fair and equitable treatment." The government was even
ordered by the court to compensate Vodafone.

FACTS

The facts of the case are as such that in May 2007, a British telecommunication company
Vodafone International Holdings procured 67% stake for USD 11.1 billion from Hutchison
Telecommunications International Ltd.
“
In October 2009, a notice was issued by the Income Tax Department against Vodafone
International Holdings BV, under provision of Section 201 and 201(1A) of the Income Tax
Act of 1961, requesting Rs. 7,900 crores as capital gains and withholding tax. The arguments
presented by the Income Tax Department were since the sale involved an Indian asset, any
profit from the transaction was taxable in India. the opposite party contended that since the
deal took place outside of India in Cayman Islands, and involves a Dutch firm and a business
domiciled in the Cayman Islands, so they do not have to pay any taxes to the Indian
government.”
“The case went from high court to supreme court, post which, a retrospective amendment in
the Income Tax Act 1961 was introduced in 2013, resulting in putting the onus of taxation
again on Vodafone. Vodafone then approached the Permanent Court of Arbitration in Hague
with the case and it invoked Clause 9 of the Bilateral Investment Treaty (BIT) that was
entered by India and the Republic Kingdom of Netherlands in 1995.”

ISSUE
The issue dealt in Permanent Court of Arbitration in Hague is whether the act of introducing
an amendment to the Income Tax Act 1961 by Indian government retrospectively, violates
the Bilateral treaty between India and Netherlands.

ABOUT THE BILATERAL TREATY:

“The bilateral treaty is a treaty entered by India and Netherlands on 6 th November 1995 for
the promotion and protection of investment by companies in both countries. This treaty is a
pact between the governments of two or more nations that specifies the terms and conditions
allowing individuals and businesses from one nation to make private investments in another
nation. Such agreements have as their major goal ensuring that the host country's government
does not discriminate against foreign investments and safeguards the investments made by
investors from both nations.”

ANALYSIS
This type of dispute between Vodafone and Indian government is the perfect example of an
investor and state dispute. In this case the Permanent Court of Arbitration ruled against the
Indian Government unanimously.

The Permanent Court of Arbitration (PCA) ruled that the Republic of India (India) and the
Kingdom of the Netherlands' Agreement's "fair and equitable treatment" was violated by the
imposition of taxation through a retroactive revision to domestic tax legislation for imposition
of tax (Netherlands). Furthermore, any attempt to compel Vodafone to pay a tax would be a
violation of international agreements. The agreement's main goal is to protect and promote
investments (India- Netherland BIT).

Vodafone's violation of the bilateral investment agreement and the United Nations
Commission on International Trade Law was the primary factor in the decision's favour
(UNCITRAL). According to BIT Article 9(1), " 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." The arbitral panel's constitution "
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" according to Article 3(5) of the UNCITRAL Arbitration Rules.

Apart from this, another violation of Article 4(1) of the Bilateral Investment Treaty between
Indian and Netherland was observed by the Permanent Court of Arbitration, that was done by
the Indian Government for “the protection of the guarantee of fair and equitable treatment”.

CONCLUSION
The agreement's main goal is to protect and promote investments (India- Netherland BIT).
Furthermore, any attempt to compel Vodafone to pay a tax would be a violation of
international agreements.
For future cross-border transactions, India must design effective and transparent dispute
resolution systems in order to avoid the need for costly and time-consuming litigation in
foreign courts. The convenience of conducting business will increase if the arbitration
ecosystem is improved.