April 12, 2016 | By Keith Martin in Washington, DC

India continues trying to collect taxes from foreigners holding investments in India through offshore holding companies when shares in the offshore companies are transferred or sold.

The country has been locked in a long-running dispute with Vodafone, which India says owes at least $2.1 billion in capital gains taxes that were triggered when the telephone company bought a 52% interest in an Indian mobile phone business, plus options to take its interest to 67%, from Hong Kong-based Hutchison Whampoa for $11.2 billion in 2007.

Vodafone bought a Cayman Islands subsidiary of Hutchison Whampoa that owned an interest in a mobile phone company in India through several tiers of Mauritius companies.

Vodafone said that even if a tax was triggered by the sale, it bought the shares, and the seller — not Vodafone — should be taxed on the gain. However, Indian law requires a buyer to withhold tax from the purchase price where the seller is outside the Indian tax net.

The Indian Supreme Court ruled in 2012 that the share transfer was not subject to tax in India.

The Indian government then put a bill through parliament to impose such taxes retroactively on offshore share transfers back to April 1962. However, there is a six-year statute of limitations on back tax claims.

Vodafone asked the International Court of Justice in The Hague in May 2014 to commence an arbitration under the bilateral investment treaty between India and Holland, where the Vodafone subsidiary that bought the shares is located. An issue in the arbitration is whether the bilateral investment treaty can be used in connection with tax disputes. Both sides appointed arbitrators, but the two party-appointed arbitrators could not agree on a third, neutral arbitrator. Vodafone asked the court in March to name one.

The Indian government renewed its demand that Vodafone pay the taxes in a letter to the company in February.

Meanwhile, the Indian government included a one-time settlement offer for all companies that made indirect share transfers in its latest budget message to parliament. The offer is the government will not ask for penalties and interest if the companies pay the underlying taxes on the share transfers.

Cairn Energy PLC, an independent oil and gas exploration company, initiated international arbitration proceedings in January with India to resolve a dispute over a $1.6 billion tax assessment purportedly triggered by a share transfer as part of an internal reorganization in 2006.

Separately, Kawasaki Heavy Industries won a favorable decision before a tax tribunal in India over whether a liaison office it established in India created a “permanent establishment” for the Japanese parent company in India, thereby subjecting the parent company’s profits on all Kawasaki equipment sales in India to tax in that country. Japan and India have a tax treaty that is supposed to prevent India from collecting income taxes on income that Japanese companies earn outside India on sales to Indian customers unless the seller has a permanent establishment in India that helped make the sale.

The tax tribunal said that a mere liaison office does not create a permanent establishment. The office operated under a limited power of attorney that made clear the liaison office could not bind the parent company and was only to be involved in preparatory activities. When the Reserve Bank of India granted Kawasaki permission to open the liaison office, it said, “except for the proposed liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature, nor shall it enter into any business contracts in its own name without prior permission.”

There was no evidence the liaison office was involved in any of the sales that the tax assessor wanted to attribute to it.

The Delhi Income Tax Appellate Tribunal rendered a decision in the case in February. The case is Kawasaki Heavy Industries Ltd. v. ACIT.