Govt plan to drop conciliation offer prompted Vodafone arbitration move

Telecom major Vodafone‘s international arbitration notice in its Rs 24,000-crore tax dispute with the government came after the income tax department decided to withdraw its conciliation offer in the matter without waiting for a tribunal’s decision in the transfer pricing case.

Officials said the tax department had prepared a Cabinet note to withdraw conciliation on Finance Minister P Chidambaram‘s instructions. “The note was moved before we received the arbitration notice on April 17,” said the official, asking not to be named.

On Thursday, Chidambaram said he had already proposed to the Cabinet that since Vodafone had issued a fresh arbitration notice, the original offer of a non-binding conciliation should be considered withdrawn. “That offer is no longer there,” he told reporters here.

In its April 17 notice, Vodafone said it would go ahead with an international arbitration, preferably in London, to resolve the long-pending tax dispute concerning its 2007 acquisition of Hutchison Whampoa’s stake in Hutchison-Essar. It gave the government two months to respond to the notice.

The latest Cabinet note was the second proposal to withdraw the conciliation offer. The finance ministry had circulated another Cabinet note seeking to withdraw the offer in February, too. However, the Cabinet had put that on hold, pending settlement of Vodafone’s transfer-pricing case at theIncome Tax Appellate Tribunal (ITAT), and asked the tribunal to hear it expeditiously.

However, the I-T department decided to move a second note, as it found the ITAT hearing was not ending anytime soon. Asked why the department did not wait for ITAT’s decision, the official said: “Hearing on the transfer-pricing case was on at ITAT, but it was taking time.”

Other sources close to the development said Vodafone served the arbitration notice after a three-month window given in the conciliation offer, which started on January 17, ended. They said India would have to appoint arbitrator of its choice by June 17, failing which international arbitration court could appoint an arbitrator on its behalf.

The finance ministry is confident that Vodafone doesn’t have a basis to go for international arbitration. According to officials, the notice was served under the Bilateral Investment Promotion and Protection Agreement (Bippa) between India and the Netherlands, which does not cover tax issues.

In 2012-13, the government had amended the Income Tax Act with retrospective effect to upturn a Supreme Court judgment and tax Vodafone on Hutchison-Essar deal. The dispute relates to the income-tax department’s demand of Rs 7,900 crore of tax from Vodafone. It was later raised to Rs 23,800 crore with interest of around Rs 8,000 crore and a penalty of Rs 7,900 crore for defaulting on tax payment.

But later, as the move got India a lot of criticism and negative publicity, the finance ministry agreed to make a conciliation proposal to Vodafone.

Parthasarathi Shome, advisor to the finance minister, said,”I had wished and hoped the conciliation would have been feasible because then, a huge amount of revenue could have been garnered. But it’s a government decision….” Shome, who headed a panel to review the retrospective amendments to the I-T Act, was talking to reporters on the sidelines of an Assocham event to felicitate him.

A Cabinet approval was taken for the conciliation, but the process could not start, as Vodafone wanted it under the United Nations Commission on International Trade Law (Uncitral), while the government was not ready to do it outside the Indian Arbitration and Conciliation Act.

Besides, Vodafone wanted to club its transfer-pricing cases in the same conciliation. The company is fighting a Rs 3,700-crore transfer-pricing dispute with tax authorities for a transaction made in 2008-09. Recently, the tax department had added another Rs 3,200 crore to the income of Vodafone in a fresh transfer-pricing case, pegging its additional tax liability at over Rs 1,000 crore.

“Since Vodafone and the Indian government have been unable to find an amicable means of resolving the dispute, Vodafone has commenced an international investment arbitration as a way to achieve resolution,” the telecom company had said in a statement on Wednesday.