A customer at a Vodafone store in Mumbai. Photo: AFP

The Indian government is reportedly considering its legal options after losing an international tax arbitration case regarding retrospective taxation against telecom operator Vodafone last month.

It will decide on challenging the award before a court in Singapore, after taking legal opinion, the Press Trust of India reported, quoting sources.

The government is looking to limit damages not only in Vodafone’s case, but also in a separate lawsuit with the UK’s Cairn Energy plc, which could involve a bigger payout. In the Vodafone case, the cost implication is limited to the payment of the legal costs to the telecom operator.

Last month, an international arbitration court ruled that the Indian government seeking 221 billion rupees (US$3 billion) in taxes from Vodafone using retrospective legislation was in “breach of the guarantee of fair and equitable treatment” guaranteed under the bilateral investment protection pact between India and the Netherlands.

In 2007, Vodafone International Holding, a Netherlands company, had bought 100% of the shares of Cayman Island-based company CGP Investments for $11.1 billion to indirectly get 67% control of Hutchison Essar Ltd, an Indian company.

The Indian tax department felt the deal was designed to avoid capital gains tax in India and imposed a tax demand.

The government’s contention was rejected by the Indian Supreme Court in 2012. It had noted that the Indian tax authorities’ demand for capital gains tax “would amount to imposing capital punishment for capital investment since it lacks the authority of law.”

To prevent such indirect transfer of Indian assets, the government subsequently amended the law to make such transfers taxable in India and slapped a fresh demand on Vodafone.

In 2014, Vodafone initiated international arbitration after an out-of-court settlement with the Indian government broke down. The Permanent Court of Arbitration in The Hague ruled in favor of Vodafone Group.

Interestingly, it was a unanimous decision – even India’s appointed arbitrator Rodrigo Oreamuno had ruled in its favor. The tribunal held that any attempt by India to enforce the tax demand would be a violation of India’s international law obligations.

Cairn case

The Indian government could end up paying $1.5 billion in the Cairn Energy case if a separate arbitration panel holds its tax demand as illegal.

The British oil and gas explorer had in January 2014 received a notice from Indian tax authorities requesting information related to the group reorganization done in 2006. The tax department also attached the company’s near 10% shareholding in its erstwhile subsidiary, Cairn India.

A year later, Cairn Energy initiated an international arbitration to challenge retrospective taxation.

Cairn Energy began investing in India in the 1990s and in 2004 it made its biggest hydrocarbon discovery of the Mangala oil field in Rajasthan state. This was followed by discoveries of the Bhagyam and Aishwarya oil fields nearby.

It has so far invested about 450 billion rupees in India in various projects. Its Mangala Processing Terminal accounts for more than one third of India’s crude oil production.