Relief for Vodafone: Cabinet refrains from accepting FinMin proposal to withdraw offer for conciliation

NEW DELHI: The government on Friday signalled that it has not yet shut the door on an amicable settlement with Vodafone Plc over the company's multi-billion-dollar tax dispute with the Union Cabinet refraining from accepting a finance ministry proposal to withdraw the offer for conciliation made to the British telecom major eight months ago.

This gives some reprieve to the telco as withdrawal of the offer would have immediately made the company liable for the Rs 8,000-crore tax demand on its 2007 acquisition of Hutchison Essar that has now swelled to over Rs 20,000 crore as interest and penalty have been added.

"At this stage, we are not withdrawing the conciliation offer to Vodafone," said a finance ministry official, adding that a decision would be taken after the Income-Tax Appellate Tribunal (ITAT) adjudicates on another tax row involving Vodafone.

The Cabinet deferred a decision on the proposal and also directed the finance ministry to request the tribunal to expeditiously hear the transfer pricing case involving a Vodafone group company in India. If Vodafone loses this case, it is liable to cough up an additional Rs 3,700 crore as tax.

"After the ITAT decision, the Cabinet will review the conciliation process," the official said.
Vodafone declined comment on Friday's Cabinet decision.

The finance ministry had moved the Cabinet to withdraw the eight-month-old conciliation offer to Vodafone after the British telecom major insisted on clubbing the transfer pricing case with the negotiations over the original tax dispute.

The British telecom major Vodafone also served New Delhi with a fresh reminder in January under the India-Netherlands bilateral investment promotion agreement.

The company also wanted that conciliation be carried out under the United Nations Commission on International Trade Law (UNCITRAL) and not the Indian Arbitration and Conciliation Act, as it was uncomfortable about submitting to arbitration proceedings under Indian jurisdiction.

The government will soon respond to Vodafone's last month's notice.

The tax row between Vodafone and the government has attracted the attention of international investors and raised questions about India's attractiveness as an investment destination. The dispute has, however, not dissuaded Vodafone from stepping up investments in India.

The company recently raised its stake in its Indian arm to 100% and also bid aggressively in the spectrum auctions that concluded recently.

The origins of the dispute lie in the decision of the Indian tax authorities, a few years ago, to impose a principal tax liability of Rs 7,899.9 crore on Vodafone for failing to deduct tax on its $11-billion payment to Hutchison Telecommunications International for the acquisition of Hutchison Essar (now called Vodafone India).