British telco Vodafone Group won a decade-long battle against the Indian government in a case relating to retrospective taxation under which the income tax department had raised a demand of around Rs 22,000 crore on the telecom major.

What does this case pertain to and where did all begin?

Here’s a timeline of all the events that led up to it and how Vodafone eventually emerged the winner:

~ In 2007 Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar.

~ The Dutch affiliate of the Vodafone Group, Vodafone International Holdings B.V. (VIH) acquired 67% interest in the Indian telecom company Hutchison Essar Limited (HEL) for $11 billion.

~ This transaction took place in 2007, through an agreement between VIH, and the Hutchison Telecommunications International Limited (HTIL) involving a Cayman Island~ based company CGP Investments Limited (CGP), which in turn, directly and indirectly, held 67% interest in Hutchison Essar Limited (HEL), the Indian company. 

~ Following this transaction, the Indian income tax authorities issued a notice demanding payment of $2.2 billion as capital gains tax, which Vodafone contended it was not liable to pay as the transaction between HTIL and VIH did not involve the transfer of any capital asset situated in India.

~ Vodafone maintained that the deal was carried forward entirely offshore, where the Indian tax authorities had no say and continued to operate within the country.

~ But the IT department continued to chase after Vodafone.

~ The matter went up to the Bombay High Court, which decided that Vodafone was liable to pay the taxes as claimed by the income tax authorities.

~ In 2012, on appeal by Vodafone, the Supreme Court reversed the Bombay High Court judgment and held that the company was not liable to pay any tax. It ruled that Vodafone’s actions were ‘within the ambit of the law’.

~ It also suggested that Indian taxmen should ‘look at’ the transaction objectively rather than through the lens of ulterior motive.

~ But the Indian government was intent on recovering Rs 20,000 crore in unpaid taxes, interest and penalty.

~ On March 16, 2012, in the Union Budget, an amendment to the Income Tax Act was inserted, specifying that income arising from sale of shares or units shall be deemed to accrue or arise in India if transfer of a share or other interest in a company or entity had taken place outside India, and the value of the share or unit depended primarily on assets in India.

~ The amendment applied retrospectively from 1962 (when the law had come into effect) and applied to all transactions that had taken place ever since.

~ In effect, the amendment overruled the Supreme Court’s order, making Vodafone liable once again.

~ The revenue officials sought to capitalise through this rule and persisted on pursuing the case against Vodafone. They believed they could net some good cash through this and other high value acquisitions.

~ The UPA government, under then Prime Minister Manmohan Singh, had raised a tax demand of Rs 11,000 crore to Vodafone's $11-billion acquisition of Hutchison Telecom stake in 2009.

~ The then Indian government decided to place tabs on foreign companies by coming up with the General Anti~ Avoidance Rule (GAAR). This rule basically stated that the government could unearth past deals, all the way back to 1962.

~ There was a huge furore following which GAAR was postponed to 2016.

~ The retrospective amendment was a political thunderbolt in the aftermath of which, amidst widespread outrage in the business community, Pranab Mukherjee – the then Finance Minister who had been responsible for the amendment’s passage – resigned and subsequently became India’s President.

~ Pranab Mukherjee’s successor, P Chidambaram, struck a conciliatory tone with Vodafone and ‘persuaded’ the company to not immediately initiate international arbitration. Instead a conciliation process began between the company and the government.