Vodafone initiates investment arbitration against India - Livemint

The long-running tax dispute is over Vodafone’s acquisition of its Indian mobile assets in 2007. Photo: Mint

New Delhi: Vodafone Group Plc has abandoned the conciliation process and started international investment arbitration against the Indian government over its long-running tax dispute.

The tax department and Vodafone have been locked in a dispute since 2007 over the telecom company’s $11 billion acquisition of Hutchison Essar Ltd , now known as Vodafone India Ltd . The tax demand, which was initially around Rs.8,000 crore, has now more than doubled to Rs.20,000 crore after adding interest and penalty.

“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 company said in a statement. It filed the arbitration on 17 April.

The conciliation process, initiated by the Indian government last year under domestic laws, will now be discontinued.

“This means that Vodafone has formally rejected the government’s offer for a non-binding conciliation under Indian laws. Vodafone now wants to escalate the issue beyond the border and take it into international arbitration,” said Mukesh Butani , chairman, BMR Advisors , an accounting firm. “India could possibly argue that tax proceedings cannot be covered under international arbitration under BIPA (bilateral investment promotion and protection agreements).”

Vodafone International Holdings BV has filed for arbitration under the bilateral investment protection agreement between India and the Netherlands, questioning the government’s enactment of the retrospective tax laws in 2012 that made the telecom company liable to pay tax even after a favourable apex court judgement.

In 2007, Vodafone International Holdings, a Dutch unit of the British telecom firm, bought the Indian business operations of Hutchison Telecommunications International Ltd through the sale of a Cayman Islands-based firm called CGP Investments Ltd, a unit of Hutchison.

The Indian tax department has estimated that Vodafone should have withheld part of the amount as tax while paying Hutchison. Vodafone and the tax authorities went to court to resolve the issue. The Supreme Court, in its judgement in January 2012, said the deal was not taxable in India. Subsequently, the government introduced retrospective amendments to laws to bring such indirect transfer of shares under the tax net. It also introduced a validation clause that made Vodafone liable to pay tax in India despite the apex court’s judgment.

Vodafone then proceeded with initiating arbitration under the bilateral investment protection agreement signed by the Netherlands and India. It argued the retrospective amendment amounted to a denial of justice and a breach of the Indian government’s obligations to accord fair and equitable treatment to investors.

The Indian government, after seeking the law ministry’s nod, has drafted a Cabinet note for withdrawing the non-binding conciliation offer it had made to Vodafone in June last year, PTI news agency reported.

This is in contrast to the government’s earlier stand in February, where the Cabinet had put on hold the proposal to withdraw the conciliation offer, pending settlement of Vodafone’s Rs.3,700 crore transfer-pricing case at the Income Tax Appellate Tribunal.