Delhi HC halts 2nd arbitration by Vodafone in Rs 11,000 cr tax

New Delhi: The Delhi High Court on Tuesday restrained Vodafone Group's arbitration proceeding against India, under a treaty with the United Kingdom, in connection with a Rs 11,000 crore tax demand raised against the company in relation to its USD 11 billion deal acquiring stake of Hutchinson Telecom.

Justice Manmohan restrained Vodafone or its subsidiaries from going ahead with arbitration under the India-UK Bilateral Investment Protection Agreement (BIPA) as the telecom major had initiated similar proceedings on the same issue under the the India-Netherlands BIPA.

"This court is of the prima facie view that in the present case, there is duplication of the parties and the issues. In fact, the reliefs sought by the defendants under the India-UK BIPA and by the Vodafone International Holdings BV (VIHBV), the subsidiary of defendants (Vodafone group), under the India-Netherlands BIPA are virtually identical.

"This court is further of the prima facie view that there is a risk of parallel proceedings and inconsistent decisions by two separate arbitral tribunals in the present case. In the prima facie opinion of this Court, it would be inequitable, unfair and unjust to permit the defendants to prosecute the foreign arbitration," the court said in an interim order.

It also issued notice to Vodafone and sought its response by October 26 on the central government's plea seeking a permanent injunction against the telecom major from proceeding with the arbitration under the India-UK BIPA.

In its interim order, the court was also of the prima facie view that "India constitutes the natural forum for the litigation of the defendants' (Vodafone and its subsidiaries) claim against the plaintiff (Centre)".

The court noted that government was of the view that the USD 11 billion acquisition of stake of Hutchinson Telecommunications International Limited (HTIL) in Hutchinson Essar Limited (HEL) by Vodafone was liable for tax deduction at source (TDS) under the Income Tax Act.

As Vodafone had not deducted the tax at source, the government had raised the demand of Rs 11,000 crore which was subsequently quashed by the Supreme Court on January 20, 2012, the high court said. Thereafter, the government made a retrospective amendment to the Income Tax Act which re-fastened the liability on Vodafone, the high court order noted.

Aggrieved by the imposition of tax, VIHBV invoked the arbitration clause under the BIPA between India and Netherlands through a notice of dispute of April 17, 2012 and notice of arbitration of April 17, 2014, the 10 page order said.

While the proceedings under the India-Netherlands BIPA was pending, Vodafone initiated arbitration under the India-UK BIPA on January 24 this year. Challenging the second arbitration, the government, represented by Additional Solicitor General (ASG) Sanjay Jain, has said the two claims are based on the same cause of action and seek identical reliefs but from two different tribunals constituted under two different investment treaties against the same host state.

The ASG, assisted by central government standing counsel Sanjeev Narula, argued before the high court that the arbitration proceedings initiated under the India-UK BIPA was an abuse of the process of law.

The government lawyers argued that disputes encompassing tax demands raised by a host state are beyond the scope of arbitration provided under the bilateral investment treaty as taxation is a sovereign function and the same can only be agitated before a constitutional court of the host state.

They also contended that laws passed by the Parliament cannot be adjudicated by an arbitral tribunal and do not fall within the ambit of BIPA or any other international treaty.