NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES
CASE: VODAFONE VS GOVERNMENT OF INDIA
A CORPORATE ACCOUNTABILITY ISSUE
ETHICAL ISSUES IN MANAGEMENT
PROF ABHAY BHAT
Submission Date- 14th July 2023
Name- Abhishek Kumar Jha
Roll No.- C004
SAP ID- 80512300784
CONTEXT AND FACTS OF THE ISSUES
Introduction
The Indian Ministry of Finance's proceed to retrospectively impose tax laws in an effort to
overturn the Supreme Court's verdict ordering Vodafone to pay INR 22,500 crores in capital
gains and withholding tax is at the centre of the controversy. Following that, Vodafone filed a
lawsuit with The Hague's Permanent Court of Arbitration. In a unanimous verdict, the Court
sided with Vodafone and found the Indian government's tax demand to be unfair. In addition,
the court ordered the government to pay Vodafone compensation.
Background
Hutchison Telecommunications International Limited (HTIL) is a company based in Hong
Kong that held a majority stake of 67% in Hutchison Essar Limited, which is an Indian
company. Vodafone International Holding BV (VIHBV) which is a subsidiary of Vodafone
Group Plc based in India, entered into an agreement to acquire a 67% share in HTIL for $11.1
billion. In May 2007, the deal took place in the Cayman Islands that resulted the transfer of
assets from an Indian corporation. The name of Indian company Hutchison Essar Limited was
changed to Vodafone Essar Limited. However, the Income Tax Department of India expressed
dissatisfaction with this deal and initiated an investigation against Vodafone.
Contention of Parties
The Indian Ministry of Finance's proceed to retrospectively impose tax laws in an effort to
overturn the Supreme Court's decision compelling Vodafone to pay INR 22,500 crores in
capital gains and withholding tax is at the root of the controversy. Following that, Vodafone
filed a lawsuit with The Hague's Permanent Court of Arbitration. In a unanimous verdict, the
Court sided with Vodafone and found the Indian government's tax demand to be unfair. In
addition, the court ordered the government to pay Vodafone compensation.
Court cases
The Bombay High Court ruled against Vodafone International Holding BV (VIHBV) on
September 8, 2010, identifying this case as an example of tax evasion rather than tax avoidance.
When VIHBV learnt of the decision, it filed an appeal with the Indian Supreme Court. On
January 20, 2012, the Supreme Court ruled in favour of VIHBV, noting the fact that the
transaction took place outside of India and included two non-resident entities. As a result, the
tax imposition was deemed unconstitutional since the transaction did not fall under the
jurisdiction of Indian tax authorities. Furthermore, the Supreme Court refused the Income Tax
Department's plea for a review on March 20, 2012.
Retrospective taxation
Finance Minister Mr. Pranab Mukherjee submitted a retroactive revision to the Income Tax Act
of 1961 in order to get around the Supreme Court's ruling. Beginning on January 1, 1962, this
alteration was made with retroactive effect. According to the administration, the modification
was just a clarification meant to provide clarity and remove any doubt. However, this action
1|Page
damaged India's standing as a desirable investment location. Investors expressed concerns and
uncertainties over the retrospective revision, which prompted questions about the stability of
the regulatory system in the nation.
Case went to Permanent Court of Arbitration (PCA)
The Income Tax Department of India used the law's retrospective change to issue the Vodafone
group a fresh demand in January 2013 for a total of INR 11,280 crores. The Tax Administration
Reform Commission, which was formed to look into such issues, has urged against
retrospective taxes of this kind since it is unpopular worldwide. Vodafone filed a lawsuit at The
Hague's Permanent Court of Arbitration (PCA) after becoming frustrated. They referred to
paragraph 9 of the Bilateral Investment Treaty, which the Netherlands and India signed on
November 6, 1995. The purpose of this provision was to encourage and protect bilateral
investments in one another's territory.
Judgement given by PCA
1. Given that they lack the legal authority to do so, the Indian government should desist from
making any tax claims against Vodafone and end all efforts to collect them.
2. The petitioners are entitled to receive payment from the Indian government for 60% of the
arbitration expenses.
Reason Behind the Judgement
1. The Indian government violated the promise of fair and equal treatment by breaching
Article 4(1) of the Bilateral Investment Treaty.
2. The bilateral investment has been breached, as mentioned in BIT Article 9(1), which
emphasises the significance of friendly dialogue for resolving problems between
contracting parties' investors.
3. The United Nations Commission on International Trade Law (UNCITRAL) has been
violated, specifically Article 3(5) of the UNCITRAL Arbitration Rules, which requires that
controversies over the sufficiency of the notice of arbitration be resolved by the arbitral
tribunal without jeopardising its constitution.
The Ethical Quandary involved in the case:
1. Tax Avoidance vs Tax Compliance- GOI argued that Vodafone should pay Capital gains
Tax but on the other hand Vodafone argued that it not articulated in any of the Tax laws to
pay such type of taxes. The ethical dilemma Vodafone was facing whether it should pay the
tax because of moral obligation or minimize its tax burden through legal means.
2. Legal Certainty vs Retrospective Legislation: The GOI changed the law in 2012 and
articulated that it should be followed in retrospective manner since 1961 when Income Tax
Laws was formed. This posed an ethical dilemma for Vodafone as it had already paid the
taxes and believed that it would not be liable to pay. Also, the ethical question generated
here that whether GOI should form a law retrospectively or not.
3. Corporate Social Responsibility- Vodafone response to Tax dispute can be seen as
inconsistent with its social responsibilities as a corporate citizen. Vodafone should
contribute to country’s development and should comply with the Tax Laws of the country.
2|Page
4. Sovereignty vs Investment Climate- The dilemma here with GOI that on what matter it
should focus. The dilemma was how to balance the right to impose taxes and regulate the
economy to maintain a favourable environment for foreign investment.
CRITICAL PERPECTIVE
Critical Analysis of Ethical Issues involved
In case of Vodafone
1. Transfer Pricing- Vodafone shifted its taxable profits to a tax haven country and escaped
from taxes in India through special purpose vehicle. The process involved was preplanned
to overcome tax burden in India.
2. Tax Avoidance- Hutchison Essar limited was paying Tax but just because an operating
company pays taxes in India the investor company can’t exempted from paying Capital
Gain Tax.
3. Liability to Indian Tax- VIL purchased HTIL's 67% controlling stake in the Indian business
HEL (along with significant additional rights). This involved the transfer of an Indian
capital asset. Capital gains are subject to Indian income tax. The decision, in our humble
opinion, amounts to a miscarriage of justice. This is a good subject for retrospective
legislation to correct the wrong.
4. Economic Impact- The outcome of the case could have affected Vodafone’s operations and
investments in India. This would potentially impact job and economic growth.
5. Social Impact- The necessity to pay public services and infrastructure motivate the
government to quest for tax revenues. Removing the tax burden by Vodafone disintegrating
its thought from social service.
In case of Government of India
1. Introducing retrospective Legislation- It sent a negative signal to foreign investors and
raised concern about the rule of law and the protection of investor’s right in India.
Therefore, this action was widely criticized.
2. Lack of transparency- It emphasised the importance of transparent and consistent tax
policy, as well as a fair and impartial tax administration procedure. The actions of the
Government of India not only produced an unfavourable picture of India's economic
climate, but also resulted in lengthy judicial fights and a loss of investor trust.
3. International Reputation- The Vodafone case impacted India's worldwide reputation. The
implementation of retrospective law was viewed as a break from established norms and
best practises. It aroused worries among foreign investors about the Indian regulatory
environment's stability and dependability.
3|Page
Here are some suggestions about how I would approach the Vodafone
matter if I were representing the Government of India (GOI):
1.
2.
3.
4.
5.
6.
Legal defence- A strong legal defence was necessary as there were some legal officials who
were corrupted and didn’t show the actual picture. They didn’t concentrate on major details.
For example, HEL which was operating in India wasn’t the independently operating
companies and therefore Vodafone should liable to pay tax.
Constitutional and Legal basis- I would underline the constitutional and legal grounds for
the GOI's activities. I would stress any articles or legislation that provide the GOI power to
impose the disputed tax or regulatory actions. The legal team would look into whether the
GOI's activities are in accordance with applicable laws and regulations.
Argument for the public interests: Highlight the GOI's stance on preserving the interests of
the public and securing compliance with tax and regulatory systems. Present your case as
a necessary step to protect the country's tax revenues, economic stability, or other valid
policy goals. This might include claims about tax evasion, money laundering, or national
security.
Maintain transparency and dialogue: It is critical that the GOI maintain transparency
throughout the legal process. Engage in open discussion with Vodafone and its
representatives to address issues and, when appropriate, seek viable options for settlement.
Negotiations or alternative conflict resolution approaches might be used.
Implement a thorough public relations plan: To guarantee that the GOI's perspective is
successfully communicated to the public. Emphasise the significance of fair and equitable
taxes, the protection of national interests, and the preservation of a stable regulatory
framework for economic development and investment.
Revisiting Tax laws- I wouldn’t change the law retrospectively to aim only one or two
company. Rather I would revisit all the cases, identify the gap and loophole with the help
of well-educated lawyers and would try to make it resistant to such type of unethical
practices.
4|Page
Similarity Report ID: oid:9832:39035832
PAPER NAME
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WORD COUNT
CHARACTER COUNT
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PAGE COUNT
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SUBMISSION DATE
REPORT DATE
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Jul 14, 2023 10:32 PM GMT+5:30
8% Overall Similarity
The combined total of all matches, including overlapping sources, for each database.
2% Internet database
0% Publications database
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Summary
NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES
CASE: VODAFONE VS GOVERNMENT OF INDIA
A CORPORATE ACCOUNTABILITY ISSUE
ETHICAL ISSUES IN MANAGEMENT
PROF ABHAY BHAT
Submission Date- 14th July 2023
Name- Abhishek Kumar Jha
Roll No.- C004
SAP ID- 80512300784
CONTEXT AND FACTS OF THE ISSUES
Introduction
The Indian Ministry of Finance's proceed to retrospectively impose tax laws in an effort to
1
overturn the Supreme Court's verdict ordering Vodafone to pay INR 22,500 crores in capital
gains and withholding tax is at the centre of the controversy. Following that, Vodafone filed a
lawsuit with The Hague's Permanent Court of Arbitration. In a unanimous verdict, the Court
sided with Vodafone and found the Indian government's tax demand to be unfair. In addition,
the court ordered the government to pay Vodafone compensation.
Background
2
Hutchison Telecommunications International Limited (HTIL) is a company based in Hong
4
Kong that held a majority stake of 67% in Hutchison Essar Limited, which is an Indian
company. Vodafone International Holding BV (VIHBV) which is a subsidiary of Vodafone
Group Plc based in India, entered into an agreement to acquire a 67% share in HTIL for $11.1
billion. In May 2007, the deal took place in the Cayman Islands that resulted the transfer of
assets from an Indian corporation. The name of Indian company Hutchison Essar Limited was
changed to Vodafone Essar Limited. However, the Income Tax Department of India expressed
dissatisfaction with this deal and initiated an investigation against Vodafone.
Contention of Parties
The Indian Ministry of Finance's proceed to retrospectively impose tax laws in an effort to
1
overturn the Supreme Court's decision compelling Vodafone to pay INR 22,500 crores in
capital gains and withholding tax is at the root of the controversy. Following that, Vodafone
filed a lawsuit with The Hague's Permanent Court of Arbitration. In a unanimous verdict, the
Court sided with Vodafone and found the Indian government's tax demand to be unfair. In
addition, the court ordered the government to pay Vodafone compensation.
Court cases
The Bombay High Court ruled against Vodafone International Holding BV (VIHBV) on
September 8, 2010, identifying this case as an example of tax evasion rather than tax avoidance.
3
When VIHBV learnt of the decision, it filed an appeal with the Indian Supreme Court. On
January 20, 2012, the Supreme Court ruled in favour of VIHBV, noting the fact that the
1
transaction took place outside of India and included two non-resident entities. As a result, the
1
tax imposition was deemed unconstitutional since the transaction did not fall under the
jurisdiction of Indian tax authorities. Furthermore, the Supreme Court refused the Income Tax
Department's plea for a review on March 20, 2012.
Retrospective taxation
1
Finance Minister Mr. Pranab Mukherjee submitted a retroactive revision to the Income Tax Act
1
of 1961 in order to get around the Supreme Court's ruling. Beginning on January 1, 1962, this
1
alteration was made with retroactive effect. According to the administration, the modification
was just a clarification meant to provide clarity and remove any doubt. However, this action
5
1|Page
damaged India's standing as a desirable investment location. Investors expressed concerns and
uncertainties over the retrospective revision, which prompted questions about the stability of
the regulatory system in the nation.
1
Case went to Permanent Court of Arbitration (PCA)
1
The Income Tax Department of India used the law's retrospective change to issue the Vodafone
group a fresh demand in January 2013 for a total of INR 11,280 crores. The Tax Administration
Reform Commission, which was formed to look into such issues, has urged against
retrospective taxes of this kind since it is unpopular worldwide. Vodafone filed a lawsuit at The
Hague's Permanent Court of Arbitration (PCA) after becoming frustrated. They referred to
1
paragraph 9 of the Bilateral Investment Treaty, which the Netherlands and India signed on
November 6, 1995. The purpose of this provision was to encourage and protect bilateral
investments in one another's territory.
Judgement given by PCA
1. Given that they lack the legal authority to do so, the Indian government should desist from
making any tax claims against Vodafone and end all efforts to collect them.
2. The petitioners are entitled to receive payment from the Indian government for 60% of the
arbitration expenses.
Reason Behind the Judgement
1. The Indian government violated the promise of fair and equal treatment by breaching
1
Article 4(1) of the Bilateral Investment Treaty.
2. The bilateral investment has been breached, as mentioned in BIT Article 9(1), which
emphasises the significance of friendly dialogue for resolving problems between
contracting parties' investors.
2
3. The United Nations Commission on International Trade Law (UNCITRAL) has been
violated, specifically Article 3(5) of the UNCITRAL Arbitration Rules, which requires that
controversies over the sufficiency of the notice of arbitration be resolved by the arbitral
tribunal without jeopardising its constitution.
The Ethical Quandary involved in the case:
1. Tax Avoidance vs Tax Compliance- GOI argued that Vodafone should pay Capital gains
Tax but on the other hand Vodafone argued that it not articulated in any of the Tax laws to
pay such type of taxes. The ethical dilemma Vodafone was facing whether it should pay the
tax because of moral obligation or minimize its tax burden through legal means.
2. Legal Certainty vs Retrospective Legislation: The GOI changed the law in 2012 and
articulated that it should be followed in retrospective manner since 1961 when Income Tax
Laws was formed. This posed an ethical dilemma for Vodafone as it had already paid the
taxes and believed that it would not be liable to pay. Also, the ethical question generated
here that whether GOI should form a law retrospectively or not.
3. Corporate Social Responsibility- Vodafone response to Tax dispute can be seen as
inconsistent with its social responsibilities as a corporate citizen. Vodafone should
contribute to country’s development and should comply with the Tax Laws of the country.
2|Page
4. Sovereignty vs Investment Climate- The dilemma here with GOI that on what matter it
should focus. The dilemma was how to balance the right to impose taxes and regulate the
economy to maintain a favourable environment for foreign investment.
CRITICAL PERPECTIVE
Critical Analysis of Ethical Issues involved
In case of Vodafone
1. Transfer Pricing- Vodafone shifted its taxable profits to a tax haven country and escaped
from taxes in India through special purpose vehicle. The process involved was preplanned
to overcome tax burden in India.
2. Tax Avoidance- Hutchison Essar limited was paying Tax but just because an operating
company pays taxes in India the investor company can’t exempted from paying Capital
Gain Tax.
3. Liability to Indian Tax- VIL purchased HTIL's 67% controlling stake in the Indian business
HEL (along with significant additional rights). This involved the transfer of an Indian
capital asset. Capital gains are subject to Indian income tax. The decision, in our humble
opinion, amounts to a miscarriage of justice. This is a good subject for retrospective
legislation to correct the wrong.
4. Economic Impact- The outcome of the case could have affected Vodafone’s operations and
investments in India. This would potentially impact job and economic growth.
5. Social Impact- The necessity to pay public services and infrastructure motivate the
government to quest for tax revenues. Removing the tax burden by Vodafone disintegrating
its thought from social service.
In case of Government of India
1. Introducing retrospective Legislation- It sent a negative signal to foreign investors and
raised concern about the rule of law and the protection of investor’s right in India.
Therefore, this action was widely criticized.
2. Lack of transparency- It emphasised the importance of transparent and consistent tax
policy, as well as a fair and impartial tax administration procedure. The actions of the
Government of India not only produced an unfavourable picture of India's economic
climate, but also resulted in lengthy judicial fights and a loss of investor trust.
3. International Reputation- The Vodafone case impacted India's worldwide reputation. The
implementation of retrospective law was viewed as a break from established norms and
best practises. It aroused worries among foreign investors about the Indian regulatory
environment's stability and dependability.
3|Page
Here are some suggestions about how I would approach the Vodafone
matter if I were representing the Government of India (GOI):
1.
2.
3.
4.
5.
6.
Legal defence- A strong legal defence was necessary as there were some legal officials who
were corrupted and didn’t show the actual picture. They didn’t concentrate on major details.
For example, HEL which was operating in India wasn’t the independently operating
companies and therefore Vodafone should liable to pay tax.
Constitutional and Legal basis- I would underline the constitutional and legal grounds for
the GOI's activities. I would stress any articles or legislation that provide the GOI power to
impose the disputed tax or regulatory actions. The legal team would look into whether the
GOI's activities are in accordance with applicable laws and regulations.
Argument for the public interests: Highlight the GOI's stance on preserving the interests of
the public and securing compliance with tax and regulatory systems. Present your case as
a necessary step to protect the country's tax revenues, economic stability, or other valid
policy goals. This might include claims about tax evasion, money laundering, or national
security.
Maintain transparency and dialogue: It is critical that the GOI maintain transparency
throughout the legal process. Engage in open discussion with Vodafone and its
representatives to address issues and, when appropriate, seek viable options for settlement.
Negotiations or alternative conflict resolution approaches might be used.
Implement a thorough public relations plan: To guarantee that the GOI's perspective is
successfully communicated to the public. Emphasise the significance of fair and equitable
taxes, the protection of national interests, and the preservation of a stable regulatory
framework for economic development and investment.
Revisiting Tax laws- I wouldn’t change the law retrospectively to aim only one or two
company. Rather I would revisit all the cases, identify the gap and loophole with the help
of well-educated lawyers and would try to make it resistant to such type of unethical
practices.
4|Page
Similarity Report ID: oid:9832:39035832
8% Overall Similarity
Top sources found in the following databases:
2% Internet database
0% Publications database
Crossref database
Crossref Posted Content database
7% Submitted Works database
TOP SOURCES
The sources with the highest number of matches within the submission. Overlapping sources will not be
displayed.
1
2
3
4
5
The WB National University of Juridical Sciences on 2022-05-14
Submitted works
newsclick.in
Internet
Uttaranchal University, Dehradun on 2022-06-21
Submitted works
Peking University Shenzhen Graduate School on 2018-05-07
Submitted works
newsroom.astm.org
Internet
5%
1%
<1%
<1%
<1%
Sources overview