Vodafone drags in transfer pricing case under global arbitration

NEW DELHI: Vodafone wants to widen the scope of its international arbitration notice against India to include an Rs 8,500-crore transfer pricing case along with the earlier tax dispute over the 2007 acquisition of Hutchison Essar, adding to the differences between the two sides as conciliation efforts have gone nowhere and are set to be officially scrapped.

The telecom company wants the issue to be covered under the India-Netherlands Bilateral Investment Promotion Agreement as per its latest notice, a government official familiar with the development told ET.

The notice of arbitration, first served last month, is understood to have hardened the government’s position in the tax case. The finance ministry has already moved a cabinet note withdrawing the conciliation offer it made to the company. “Hopefully it (withdrawal of Vodafone conciliation issue) should come up in the next cabinet meeting,” another government official said. The cabinet is likely to meet on Thursday.

ET reported last week that Vodafone had served a fresh notice to the government under the India-Netherlands BIPA.


The previous two notices served by Vodafone had only raised the Rs 20,000-crore tax demand, including interest and penalty, in respect of the acquisition while threatening to drag New Delhi to international arbitration on the issue. The company had also wanted the transfer pricing case to be included in the conciliation talks offered by the government, an issue that eventually led to the rapprochement effort not making any progress.

India has prepared a strong reply to the British telecom major’s notice that will be sent to the company after the union cabinet backs the decision to withdraw the conciliation offer. “In view of the divergent stand taken by Vodafone and the government of India, the department of revenue is of the view that conciliation process as approved by the cabinet cannot take place,” says the draft cabinet note that was reviewed by this paper. India’s proposed rebuttal to Vodafone relies on the provisions of the India-Dutch tax treaty, which the officials believe does not cover taxation matters.

The development comes at a time when the British telecom major has actually strengthened its commitment to the Indian telecom sector. The company has got permission to raise its stake to 100 per cent in its Indian arm and bid aggressively in the latest round of spectrum auctions. Indian tax authorities had imposed a principal tax liability of Rs 7,899.9 crore on Vodafone for failing to deduct tax on its $11.076 billion payment to Hutchison Telecommunications for the acquisition of Hutchison Essar, now called Vodafone India.

The tax demand was struck down by the Supreme Court, but the government then amended the law retrospectively in the 2012-13 budget making the company liable to pay tax. The retrospective changes triggered an international outcry, and made investors wary about India’s tax regime. Vodafone served its first arbitration notice to the government in April 2012, but the government, keen to restore investor confidence, agreed to a negotiated settlement.

New Delhi made an exception in the Vodafone tax dispute and offered a non-binding conciliation to the company. Vodafone insisted on formal conciliation talks outside India under Uncitral or United Nations Commission on International Trade Law, which was not agreeable to New Delhi as the union cabinet had approved conciliation only under the country’s arbitration and conciliation act. The company’s insistence on widening the scope of conciliation to cover the transfer pricing dispute seems to have persuaded the government to scrap the conciliation effort. The company had in a press release on February 19 said that the tax authorities were seeking to tax one event twice through the transfer pricing case.