The Finance Ministry has called off negotiations with Vodafone Plc to resolve the ₹20,000-crore tax dispute with the company. The move follows Vodafone’s insistence on clubbing the ₹3,700-crore dispute over transfer pricing payments as part of the overall negotiations.
Vodafone also declined to accept the Finance Ministry’s proposal to initiate arbitration proceedings under Indian law. Instead, it wanted the conciliation to take place under the United Nations Commission on International Trade Law. However, this was rejected by the Cabinet.
The Finance Ministry has sought the Union Cabinet’s approval to withdraw its June 4, 2013 decision to begin a conciliation process with Vodafone.
The immediate trigger for the Finance Ministry’s move is a letter from Vodafone on January 15 initiating action against the Government of India under the India-Netherlands Bilateral Investment Promotion and Protection Agreement. Vodafone International Holdings BV, the entity involved in the dispute, is registered in the Netherlands.
The notice from Vodafone essentially states that the tax notices will lead to substantial financial losses to the company.
“This notice further demonstrates that Vodafone is not willing to have conciliation within the scope of the Cabinet,” stated a Finance Ministry note. A Vodafone Plc spokesperson declined to comment on the development.
Once the Cabinet approves the proposal to end talks, the tax authorities will proceed to collect dues from the British company as prescribed by the Income Tax Act.
Two issues The tax department has issued Vodafone two notices. The first one relates to a capital gains tax dispute with regard to its acquisition of Hutchison Whampoa’s stake in Hutchison Essar in 2007. The second is a transfer pricing dispute with Vodafone India Services (Private) Ltd, involving ₹3,700 crore.
In December, 2013, Vodafone had suggested that the transfer pricing case be clubbed with the 2007 dispute.
This stand came after the Income Tax Appellate Tribunal, in December, had stayed the tax claim by the tax authorities on Vodafone India in a transfer pricing dispute, asked the company to deposit ₹200 crore as initial payment and submit bank guarantees for the remainder.
No scope for conciliation “It appears that Vodafone’s stand is not in consonance with the June 2013 decision of the Cabinet. That is why the Revenue Department feels the conciliation process as approved by the Cabinet cannot take place,” a Government source told Business Line .
The Law Ministry has found logic in the Finance Ministry’s view. “This being a policy matter there appears to be no legal or constitutional objection to the proposal made in the new note for the Cabinet,” the source added.
He also said that after Cabinet approval, the Income Tax Department would proceed as per the provisions of the law to collect outstanding dues from Vodafone.
The Supreme Court had ruled in Vodafone’s favour in 2012, saying it was not liable to pay tax for its acquisition of Hong Kong-based Hutchison’s Indian assets. Later, in 2012, the Government changed the rules to claim retrospective tax on concluded deals.