India’s Retrospective Taxation and Self-Inflicted Lose to Vodafone and Cairn

  • Anushka Singh and Prashant Krishna
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  • Anushka Singh

    Student at Babu Banarasi Das University Lucknow, India

  • Prashant Krishna

    Student at Babu Banarasi Das University Lucknow, India

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The art of taxation has historically been one of the most controversial and important aspect of Indian economy and its GDP. India has seen all sort of taxes dating back to 6-7th century CE from glorious days of Aryan rulers to the Turks, Mughals and British Raj. First major tax which was imposed by British in India was income tax, it was imposed on Indians to pay for extra regime sent to India send it also recover the cost of resume retrospectively for the past 6 month. Currently the retrospective taxation is being question in various places after India have faced two major defeat in the permanent Court of arbitration first against the Vodafone and then against Cairn. This raises the question, if India is heading towards privatization then why this retrospective nature of taxes is imposed onto the companies. India lost these cases unanimously which means even the candidate which India nominated doesn’t see any merit in India case. What chances do we have of winning a case when our own nominee doesn't see any merit? India changed its tax laws retrospectively in 2012, it changed its tax laws with effect from 1962 and using that from a back date demanded tax from these companies. Retrospective legislation doesn't happened more often but it only happens when some court verdict upset the existing government with the existing laws. If India wants to emerge as new investment hub for the whole world then it needs to reconsider it taxation laws for better environment for companies by providing predictable and consistent taxation, government can ensure companies for future.


Research Paper


International Journal of Law Management and Humanities, Volume 4, Issue 2, Page 2895 - 2901


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This is an Open Access article, distributed under the terms of the Creative Commons Attribution -NonCommercial 4.0 International (CC BY-NC 4.0) (, which permits remixing, adapting, and building upon the work for non-commercial use, provided the original work is properly cited.


Copyright © IJLMH 2021

I. Introduction

Cairn and Vodafone, these two companies names topped headlines for last couple of months quite prominently but what’s common to both these stories which got these completes into headlines is the fact that each one signifies a big Indian defeat because, against both these companies India was facing challenges on its retrospective taxation demand.

India changed its tax laws retrospectively in 2012, it changed its tax laws with effect from 1962 and using that from a back date demanded tax from these companies. In both of these cases these companies challenged these demands in the permanent Court of arbitration in the Hague, Netherlands and the government of India has lost both.

Vodafone has come back in headlines now because government of India has decided to appeal its further in Singapore Court because the arbitration venue was chosen to be the Hague but it had come out of the Singapore Court order, so government of India is now going back once again  to challenge it in Singapore but  in both of these cases that is Vodafone earlier and Cairn now the decision of the Permanent Court of Arbitration against India has been unanimous, All three members of the arbitration panel or all three arbitrators in each case have found no merit in government of India tax demand more importantly this arbitration panel is constituted of three-member one is a neutral member and each party nominate a member. India nominated member one of three  in each of these arbitration panels decisions being unanimously against India means that even the panel who India nominated voted against India and as found no merit in India’s case

Indian nominee in the Vodafone case was Rodrigo Oreamuno he was voted in favor of Vodafone and now J. Christopher Thomas who was India’s nominee to the arbitration panel against Cairn also voted against India, so given India’s nominee judges have not seen any merit in India’s case.

II. Truth of the State – The State Never Loses

In the case of Vodafone when government lost the case in supreme Court and it then has no other option because supreme Court has given an order, government amend the law 50 years back and in a way that it changes the supreme court’s verdict, SC has given the verdict based on today’s law but now the law itself is going back to 1962 so the law on which SC has given its verdict does not exist anymore the law which can be applied retrospectively.

It was under this law that India mad a claim of about 8000 crore on Vodafone and later the same doctor or the same law was used against Cairn to make one more demand there by saying that they have gained a capital  profit of  about 25000 crore and even that is varies from point to point from 15% to 20% to 25% so once government makes a tax demand then it start adding interest to it at a very high rate and then it add penalties and that’s how the determined on Vodafone became more than 22000 crore.

In the HC, the government of India tax department had won the case then Vodafone went to the Supreme Court there government of India lost the case and Supreme Court said, “Government of India is not justified in claiming this tag from Vodafone”[3]. Once you lose in the highest court of appeal and then it follows the truth of the bureaucracy and the truth of the state, the state is that the state never loses. But the state is so supreme that one can amend the law 50 years back and  in  a way that it changes the  supreme court’s verdict, SC has given the verdict based on today’s law but now the law itself is going back to 1962 so the law on which SC has given its verdict does not exist anymore.

III. Why India Lose the Cases

In the permanent Court of arbitration, they’ve not gone into the retrospective amendment they have said that you don’t even have to go that far because Vodafone invested in India through Subsidiary in Netherlands, with Netherland India had a bilateral investment treaty it Laps in 2016 but when this deal was done under this deal both country guarantee each other with fair and equitable treatment and it also said if a dispute arises this has to be settled by arbitration [4]

Similarly the cairn case India has lost because India and Britain had a bilateral investment treaty where they were committed to give each other fair and equitable treatment and if any dispute arose they will take it to arbitration.

The arbitration was not even bothered about the retrospective amendment and they see this tax demand as a violation of this bilateral investment treaty

But after NDA government came up with new model of bilateral treaties in 2015 and therefore the new Gove. Canceled the existing bilateral treaty, that’s why both the treaties with Netherland and Britain has lapsed but once again when these deals were done both the treaties were in effect in current model treaty that NDA Government is proposed it keeps tax jurisdiction out of these new bilateral treaties.

IV. Case What Happened

(A) What cause government to amend the law retrospectively regarding taxation? (Vodafone case)

In May 2007, 67% of the holding which were known as Hutchison Esser Limited. This included the mobile telephony Business and other assets was owned by the Hong Kong based parent company Hutchison Wampoa limited, Vodafone decided to buy Hutchison Wampoa share in India , therefore Vodafone got its Dutch subsidiary to brought share for 11.2 billion dollars and this deal was done in Cayman island. In this deal Vodafone gained capital and Hutchison Wampoa gained profit.

(B) As Hutchison Wampoa gained profit, why did Indian government went for Vodafone?

  1. Indian argument

The Indian tax department says Hutchison telecommunication limited is an Indian company and while buying an Indian company you will have to make sure you are holding on to the tax and then paying us this particular money.

  1. Vodafone international holding argument

They said this is Cayman island based company we did not by the Hutchison Essar limited directly in India but we bought CGP investment holding company which is based in Cayman and because that particular company we have about 67% of share in Hutchison Essar limited.

In defense of Vodafone the deal was done in Cayman island and since they have not made any profit out of this deal therefore companies don’t owe tax to government ,on the other hand  government of India side they don’t have any controlee over Hutchison Wampoa as the company is in Hong Kong but there is a company in India which is known as Hutchison Esser Limited and shares are going to Netherland based company known as Vodafone so the transaction has been made where the Indian assets are sold on which tax should be paid by Vodafone as this is the responsibility of company which is buying the in India, In September that year, the Indian government for the first time raised a demand of Rs.7900 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.

Vodafone challenged the demand notice in the Bombay High Court which ruled in favor of the income tax department. Subsequently, Vodafone challenged the High Court judgment in the Supreme Court. Supreme Court in 2012 ruled that Vodafone group‘s interpretation Of the Income Tax act of 1961 was correct and it did not have to pay any taxes for the stake purchase.

The same year, The then Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling. By proposing an amendment to the finance act, thereby giving the Income Tax Department The power to retrospectively tax such deals. The act was passed by the Parliament that year and the onus to to pay the taxes Fell back on Vodafone. The case had by then we came in famous as the ‘retrospective taxation case’.

  1. Government introduces finance act amendment

This clearly says if there is an acquiring company acquiring an Indian company directly or

indirectly they have to pay taxes to government of India”. The original act does not speak about the indirect acquisitions this comes into implementation from the retrospective effect that means Vodafone will have to pay all the taxes to the government of India.[5]

The amendment was criticized by investors globally, who said that the change in laws was “perverse” in nature. Following international criticism, India tried to settle the matter amicably with Vodafone, but was unable to do so. After the new NDA government came to power, It said it would not create any fresh tax liabilities for companies using the retrospective taxation route.

By 2014, all attempts by the telecommunication and the Finance Ministry to settle the issue had failed. Vodafone group then invoked Clause 9 of the Bilateral Investment Treaty (BTT) signed Between India and the Netherlands in 1995.

V. Cairn Case

Similarly in the Cairn case, Cairn is an oil explore flooring companies which found oil in Rajasthan, India’s biggest on shore  find since Bombay high this turn Rajasthan as well as Indian economy drastically

Cairn India holding was a fully owned subsidiary of holding Cairn UK holding, cairn UK holding in turn is subsidiary of cairn energy.

The transaction which took place was that the Indian assets were transferred by cairn energy (parent company) to Cairn India, in 2006 cairn India acquired total capital of India holding from cairn UK holding i.e. 69% of, against those, share were issued to in the new company that was coming to be in India which was then holding the Indian assets where oil have now been found as those assets have lots of value

Hence cairn India threw cream UK a acquired 69% equity in the company in 2011 the parent company that is care energy sold its cairn India holding to Anil Agarwal’s vedanta group but income tax came in and barred them from transferring the remaining 9.8% so the part of this company from issuing any dividends against the shares to the parent holding of cairn

Cairn Energy has filed a case in a United States court to enforce a $1.2 billion arbitration award, won in a tax dispute case against the Indian government. It aims to enforce the award under international arbitration rules, also called the New York Convention, and recover losses caused by Indian Government “unfair and inequitable treatment of their investments”.

Income-Tax Department then decided that since Cairn UK had made capital gains, it ought to pay tax up to Rs 24,500 crore.

In the Verdict, India Government has been asked to pay Rs 8,000 crore along with the interest to the Scottish oil explorer for seizing dividend, tax refund, and sale of shares to partly recover the dues. International arbitration tribunal in The Hague also ruled that the India’s demand of Rs 10,247 crore from Cairn was not valid. The retrospective tax demand was on alleged short-term capital gains that the company had made when it transferred ownership from Cairn UK Holdings to Cairn India in 2006.[6]

VI. Cairn Arbitration Award against India

Of these, the December 21 award, from a three-member tribunal at the Permanent Court of Arbitration in the Netherlands, has been recognized and confirmed by courts in the US, the UK, Netherlands, Canada and France Cairn has started the process to register the award in Singapore, Japan, the UAE and Cayman Islands, they said. The registration of the award is the first step towards its enforcement in the event of the government not paying the firm.

Once the country’s court recognizes an arbitration award, the company can then petition it for seizing any Indian government assets such as bank accounts, payments to state-owned entities, airplanes and ships in those jurisdictions, to recover the monies due to it, they said.

(A) Way Ahead

With the companies like Cairn, India can government them opportunity to invest in Indian grounds so that the amount which India will give to these companies as penalty will circulate in Indian economy and Indian government will suffer minimal economical damages.

Foreign investor need a predictable consistent tax regime instead of no tax regime, with easing up of the approachability can create many doors towards the corporate future of India.

Ease of doing business ranking of India is down mainly because of  two factors if India improve these two then India’s overall ranking of ease of doing business will improve dramatically

1st– construction permission.

2nd-Enforcement of contract.

India’s rank lies at the bottom of construction permissions and enforcement of contract

globally it is a reputation that it is impossible to enforce a contract in India for an outside new company because the legal process is very slow and construction process also is very slow in people can easily get away with corruption.


2] Author is a Student at Babu Banarasi Das University Lucknow, India

[3] Vodafone India service vs Union Of India

[4] Article 9(3)- The republic of India and The Kingdome of Netherlands for the promotion and protection of investment Agreement

[5] Section 9, Income Tax Act 1961-2018

[6] Vodafone International Holdings vs Government of India.