context

The Permanent Court of Arbitration (PCA) at The Hague (Netherlands) ruled that India’s retrospective imposition of a tax liability, as well as interest and penalties on Vodafone Group for a 2007 deal was violation of the Bilateral Investment Treaty with Netherlands and the arbitration rules of United Nations Commission on International Trade Law (UNCITRAL).

Decision

1. Tribunal has jurisdiction
2. Vodafone is entitled to fair and equitable treatment laid down in the Article 4(1) of the Agreement
3. Government of India's conduct is a BREACH of GUARANTEE under Article 4(1)

Keypoints:

• In May 2007, the British telecommunication company Vodafone Group had bought a 67% stake in a company called Hutchison Whampoa.
• For this, the Indian government for the first time raised a demand of capital gains and withholding tax from Vodafone, under the Income Tax Act of 1961. The government argued that Vodafone should have deducted the tax at source before making a payment to Hutchison.

Capital gains tax : It is the tax paid on income that derives from the sale or exchange of an asset, such as a stock or property that's categorized as a capital asset.

Retrospective Taxation:

• It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• Retrospective Taxation hurts companies that had knowingly or unknowingly interpreted the tax rules differently.
• Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies.

United Nations Commission on International Trade Law:

• UNCITRAL was established in 1966 as a subsidiary body of the United Nations General Assembly (UNGA).
• It is the core legal body of the United Nations system in the field of international trade law.
• Mandate: To further the progressive harmonization and modernization of rules on international business and reform commercial laws.
• It adopted the UNCITRAL Model Law on International Commercial Arbitration in 1985 and the UNCITRAL Conciliation Rules in 1980.
• The UNGA has recommended the use of the said Model Law and Rules in cases where a dispute arises in the context of international commercial relations and the parties seek an amicable settlement of that dispute by recourse to conciliation.
• India has also incorporated these uniform principles of Arbitration and Dispute Resolution (ADR) in the Arbitration and Conciliation Act, 1996 which has been amended several times.

International Arbitration Tribunal

• It is an independent non-governmental panel of independent and impartial experts.
• It generally comprises three members nominated by the Parties (or appointed by the International Arbitration Institution, or by a National Court) on the basis of their legal and practical expertise and knowledge, to render a final and binding award.

Permanent Court of Arbitration-

Established in: 1899.

• HQ: The Hague, Netherlands.
• Purpose: It is an intergovernmental organization dedicated to serve the international community in the field of dispute resolution and to facilitate arbitration and other forms of dispute resolution between States.

Structure: The PCA has a three-part organizational structure consisting of:

• Administrative Council - to oversee its policies and budgets,
• Members of the Court - a panel of independent potential arbitrators, and
• International Bureau - its Secretariat, headed by the Secretary-General.
• Funds: It has a Financial Assistance Fund which aims at helping developing countries meet part of the costs involved in international arbitration or other means of dispute settlement offered by the PCA.