Vodafone serves arbitration notice; Govt to drop peace offer

Vodafone, in its notice, said it wanted to move ahead with the arbitration without waiting for the ITAT decision on the Rs 3,700-cr transfer-pricing case

In a fresh development, Vodafone has served an arbitration notice to India over the Rs 20,000 crore tax dispute, prompting the government to seek withdrawal of the conciliation offer made to the British telecom firm for an amicable settlement of the tax row.

The Finance Ministry, according to official sources, has already moved a Cabinet note for withdrawal of the non-binding conciliation offer it had made to Vodafone in June last year.

In its notice on April 17, Vodafone said it will go ahead with 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 has given two months time for a response, which may mean the new government will have to take a call on the demand for arbitration.

The Cabinet had on February 28 decided to put on hold the proposal to withdraw the conciliation offer, pending settlement of Vodafone's transfer-pricing case at the Income Tax Appellate Tribunal (ITAT).

Vodafone, in its notice, said it wanted to move ahead with the arbitration without waiting for the ITAT decision on the Rs 3,700 crore transfer-pricing case.

Vodafone is locked in twin tax disputes with the government. One pertains to its 2007 acquisition and the other is the transfer-pricing case involving Vodafone India Services.

The Cabinet had in June 2013 approved a Finance Ministry proposal to go in for conciliation with Vodafone to resolve the capital gains tax dispute related to its 2007 acquisition.

While the basic tax demand is Rs 7,990 crore, the total outstanding is Rs 20,000 crore after including penalty.

Earlier this year, the Finance Ministry circulated a draft Cabinet note seeking to withdraw the conciliation talks after Vodafone demanded that the transfer-pricing row be clubbed with the capital gains tax case.

It followed a notice under the Bilateral Investment Promotion and Protection Agreement (BIPA) by Vodafone International Holdings BV to the government over the tax dispute. It said the amendment to the I-T Act will cause Vodafone International Holdings substantial financial loss.

The Cabinet thereafter decided to wait for completion of the ITAT hearing.

The Finance Ministry has insisted that the tax case does not fall within the ambit of the India-Netherlands BIPA.

The Supreme Court had ruled in Vodafone's favour in 2012, saying it was not liable to pay any tax over the acquisition of assets in India from Hong Kong-based Hutchison.

The government changed the rules later in 2012 to enable it to claim tax retrospectively on concluded deals.