Under Tax Regime in India, every Assesses are liable to pay tax in respect of income arised or accrued outside India received by them irrespective of the Residential Status and place of accrual of the assesses. "Accrue" means right to receive income or earned income and "Arised" means originated.[1]

Certain incomes are deemed to accrue or arise in India under section 9 of the Act, as discussed below:

1. Income by virtue of business connection:
   Income derived from or arising from a business connection to any assessee is deemed to accrue or arise in India if a business connection exists, whether or not through a regular agency, branch, or other type of commercial association.
    
2. Income arising from any asset or property in India:
   Income earned in a foreign country from a property in India is considered to have accrued or arisen in India. The term "property" refers to all tangible properties, whether movable or immovable.
    
3. Capital asset:
   Capital gains arising to an assessee from the transfer of a capital asset located in India are deemed to accrue or arise in India, regardless of whether the capital asset is movable or immovable property, tangible or intangible asset.
    
4. Income from salaries
   When income is charged under the heading Salaries, it is deemed to accrue or arise in India in all cases. If the services are rendered in India, the income is said to be earned in India.
    
5. Taxability of Interest
   Interest will be deemed to accrue or arise in India in the following cases, and will be taxable in the hands of the recipient regardless of his residency status (i.e. ROR, RNOR or NR).
   
   Interest payable by:
   
   1. Government; or
   2. A Resident in India, except where interest is payable in respect of moneys borrowed and used for the purpose of business or profession carried outside India or earning any income from any source outside India (i.e. Interest payable by a Resident for loan used in India for any purpose, whether for business or profession or otherwise);
   3. A Non-Resident in India provided interest is payable in respect of moneys borrowed and used for a business or profession carried on in India (i.e. Interest payable by a Non-Resident for loan used for only business or profession in India).
       
6. Taxability of Royalty
   In the following cases, royalties will be deemed to accrue or arise in India and will be taxable in the hands of the recipient, regardless of his residency status (i.e. ROR, RNOR, or NR).
   
   Royalty payable by:
   
   1. Government; or
   2. A Resident in India except where it is payable in respect of any right/ information/ property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India (i.e. Royalty payable by a Resident for right/information/property used for any purpose in India whether business or profession or for earning other incomes);
   3. A Non-Resident in India provided royalty is payable in respect of any right/ information/ property used for the purpose of the business or profession carried on in India or earning any income from any source in India (i.e. Royalty payable by a Non-Resident for right/information/property used for any purpose in India whether business or profession or for earning other incomes).
       
7. Taxability of Fees for Technical Services:
   Fees for technical services will be deemed to accrue or arise in India in the following cases, and will be taxable in the hands of the recipient regardless of his residency status (i.e. ROR, RNOR or NR).
   
   Fees for technical services payable by:
   
   1.  Government; or
   2. A Resident in India except where services are utilized for the purpose of a business or profession carried on outside India or earning any income from any source outside India (i.e. Fees for technical services payable by a Resident for services utilised for any purpose in India whether business or profession or for earning other incomes);
   3. A Non-Resident in India provided fee is payable in respect of services for the purpose of a business or profession carried on in India or earning any income from any source in India (i.e. Fees for technical services payable by a Resident for services utilised for any purpose in India whether business or profession or for earning other incomes);
       
8. Taxability of Dividend
   Regardless of whether the dividend is an interim dividend or a final dividend, and whether it is an actual dividend or a notional dividend, any dividend paid by an Indian company outside India is deemed to accrue or arise in India, and the income is thus subject to income tax.

Vodafone Case Analysis

Vodafone Group Plc is a company based in the United Kingdom, the business that Vodafone does in India is taken care of by its subsidiary Vodafone International Holding BV. The subsidiary is based in Netherlands. Similarly, Hutchison Telecommunications International Limited (HTIL) company is based in Hong Kong.

It provided telecommunication services to countries like Indonesia, Sri Lanka and India but does not operate directly. It also operates through its subsidiaries like CGP Investments Holdings Ltd. based in Cayman Island. CGP investment is fully owned by HTIL[2].

During the years 2007 to 2008, India witnessed an immense hike of Foreign Direct Investments (FDI) in its Telecommunication Industry. During the boost in the following industry, Vodafone International Holdings (Vodafone), desired to enter the Indian Market.

Vodafone had two ways to setup their business in India, one was to start from the scratch by setting up the whole infrastructure, establishing branches and recruiting the whole work force; the other way was to takeover any telecom company that was well established in India. Vodafone decided to go on with the latter way.

In the year 2007, Hutchison Telecommunications International Limited (HTIL) company decided to exit Indian market. Vodafone offered to buy a 67% stake of HTIL for 11.1 Billion Dollars. The deal took place between the companies based in Netherland (Vodafone) and Cayman Island(Hutch).

The deal took place in Cayman Island (Tax Haven) and the assets that were transferred were of an Indian company. Hutchison Essar Limited (Indian Company) became Vodafone Essar Limited. The deal got completed in May 2007. The Income Tax (IT) Department of India being not very happy with the deal and initiated an investigation against Vodafone in September 2007.

On October 30, 2009, Income Tax Department served a show cause notice to Vodafone International Holdings BV asking for 7,900 Crore Rs. as capital gains and withholding tax under Section 201 and 201(A) of the Income Tax Act,1961. The Government held Vodafone in fault under section 9(1)(i) of the Income Tax Act,1961.

The section 9(1)(i) of the Income Tax Act,1961 state that any income that deems to accrue or arise in India from any asset in located India shall be subjected to taxation. The contention of the Indian authorities was very simple: the sale involved an Indian asset, so any gain made in this transaction is taxable in India.

Vodafone however, did not agree to this contention as they believed that the deal had taken place outside India and involved a Dutch company and a company based in Cayman Island and therefore, they do not have to pay any tax to the Indian government.

The Income Tax Department continuously sent recovery notices to the Vodafone group. Vodafone challenged this notice in the High Court of Bombay and contended that the said income was not taxable in India because the transaction was wholly between two foreign companies with no income accruing or arising in India. Hence, they are not liable to deduct TDS on the said transaction.

The Bombay High Court on September 8, 2010, ruled in the favour of the Income Tax Department of India and held, "the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian Company, by another foreign company.

This being the dominant purpose of the transaction, the transaction would certainly be subject to the municipal law of India, including the Indian Income-tax Act." Bombay High Court further stated that this was a case of tax evasion and not tax avoidance and imposed a penalty of Rs.7900 Crore on Vodafone.

The said decision of the High Court was challenged by the Vodafone in the Supreme Court of India. The SC analyzed the Indian tax laws that were applicable in the said matter and reversed the judgment of the Bombay HC. The SC analyzed the scope and meaning of section 9 of the Income Tax Act and concluded that the section imposes a tax liability in the cases where there is a buying/selling of Indian assets.

The Supreme Court in its January 20, 2012, ruling held that the transaction took place between the two non-resident entities and the contract was executed outside India. Consideration was also passed outside India. This transaction was in no way under the jurisdiction of the Indian tax authorities and therefore the order of asking tax was quashed.

The Government of India filed a review petition against the judgement on February 17, 2012, but on March 20, 2012, the Supreme Court dismissed the review petition on the ground that it was non - maintainable.[3]

Later in the year 2012, the Indian Government being disappointed with the decision of the Supreme Court took a big revolutionary step. The then Finance Minister Mr Pranab Mukherjee, the late ex-President of India did something quite unpredictable. To avoid the judgement of the supreme court, he introduced an retrospective amendment in the Income Tax Act, 1961. This move was first announced in the budget speech of 2012-13.

The retrospective change became effective from the year 1962 itself. This Finance Bill 2012 amended Section 9(1)(i) of the Income Tax Act,1961 and validated the tax duty that was imposed on Vodafone. The government said that the amendment was only a clarification to remove ambiguity that was already present and provide certainty. On the other hand the move damaged the image of India as an investment destination.

India was not the only and first country to bring an restrospective amendment to a taxation law. The US, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have also retrospectively taxed the companies that took advantage of the loopholes present in their previous law.

In January 2013, the Income Tax Department issued a fresh demand to the Vodafone group for INR 11,280 in crores. Retrospective taxes are not favoured globally and the international pressure forced the Indian government to settle the matter with Vodafone. The Tax Administration Reforms Commission (TARC) headed by Dr. Parthasarathi Shome was formed to look into the matter afresh. The commission report also suggested retrospective legislation should be avoided. The committee failed to reach to any amicable solution.

The dispute being unsettled Vodafone looked for other legal methods and in the same order, it reached the Permanent Court of Arbitration in Hague in 2016, where it invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in the year 1995. [4]

In September 2020, the Hague-based arbitration court ruled in the favour of Vodafone as well and stated that the retrospective amendment made in the tax laws is against the BIT between the two countries and hence Vodafone is not liable to pay any tax or penalty in such case. The arbitration panel consisted of three members one of which was neutral and one each nominated by the party to the case. The decision was unanimously against India which means all the three members voted in favour of Vodafone.

The reason why the decision went in the favour of Vodafone was the violation of the bilateral investment treaty and the United Nations Commission on International Trade Law (UNCITRAL). Article 9(1) of the BIT says that "any dispute between an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party shall as far as possible be settled amicably through negotiations between the parties to the dispute".

Article 3(5) of the Arbitration Rules of UNCITRAL, says that the "constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal."

The Judgement in Vodafone International Holdings BV (The Netherlands) v. Government of India was as follows:
Claimant's claim that the breach of a bilateral investment treaty between the Kingdom of the Netherlands and the Republic of India for promotion and protection of investments done at The Hague on November 6, 1995, is considered and the Tribunal has jurisdiction over it.

There is a breach of Article 4(1) of the Bilateral Investment Treaty, by the Indian Government "the protection of the guarantee of fair and equitable treatment" is also violated.

3. The Government of India is not entitled to claim any tax from Vodafone and should stop any effort to recover the same.

The 60% cost of arbitration has to be paid by the government of India to the petitioners.
The Indian government was however not satisfied with the decision and filed an appeal in December 2020 against this decision in the Singapore Court of Appeal which has now been transferred to Singapore International Commercial Court (SICC). The decision of the commercial court is currently awaiting.

The Ministry of Finance on August 5, 2021, introduced the Taxation Laws Amendment Bill, 2021 in Lok Sabha. This bill removes the contentious retrospective tax demands. According to this new bill any tax demanded for indirect transfer of Indian assets before May 2012, would be nullified on fulfilment of specific conditions.

The conditions include withdrawal of pending litigation by such taxpayers and also a promise that no demand for damages will be made in future. The amendment also proposes to refund the taxes already paid by the concerned taxpayer, but without any interest.

This move of the central government will benefit Vodafone who is having a legal battle with the Government of India. The removal of the retrospective nature of the amended tax laws was long overdue. The recent Amendment Act of 2021 is definitely a step towards improving India's image and attracting adequate investments in the telecom industry.

Conclusion
Whatever happened between Vodafone and the Indian Government in the Vodafone tax case builds a very bad image of the Indian Government. According to me, the step of bringing a retrospective effect, that to after losing the case in the highest court of the land, proved the selfish motive of the government. Their this step proved that they just wanted to in anyway take tax from the Vodafone company.

This decision somewhere should the failed attempt of democracy and also many companies hesitated to invest in India after what happened with Vodafone and cairn and many other companies. In my opinion, what Vodafone did was just tax planning and not tax evasion because what they did was found a loophole in the existing Indian law and used it in their benefit.

So, I conclude saying that the recent development of amending the Income tax Act in 2021, somehow proves that government can't just take any steps, it is for and by the public and Government can�t just use people of the country for their selfish motives.

Bibliography:

1. https://www.business-standard.com/article/economy-policy/a-legal-analysis-of-the-triumph-112012300014_1.html, last accessed on 15th March,2022.
2. https://byjus.com/free-ias-prep/bitbilateral-investment-treaty/, last accessed on 15th March,2022.
3. The international arbitration case of Vodafone against India : the case study - iPleaders, last accessed on 15thMarch,2022.
4. https://economictimes.indiatimes.com/industry/telecom/telecom-news/singapore-court-has-stayed-india-tax-dispute-proceedings-under-dutch-bit-vodafone/articleshow/87741472.cms?from=mdr, last accessed on 15th March,2022.
5. https://www.icsi.edu/media/webmodules/TAX_LAWS_june2020.pdf, last accessed on 15th March,2022.

Also Read:

1. Vodafone Case Analysis
2. Vodafone Case
3. Hutch Vodafone Merger - An Issue of Tax Planning
4. A Case Study Of Vodafone International Holding v/s Union Of India