Vodafone serves fresh arbitration notice; Govt to drop peace offer

Vodafone has served a fresh arbitration notice to India over the Rs 20,000 crore tax dispute, a development that has prompted the Indian government to seek withdrawal of its conciliation offer to settle the row amicably.

The Finance Ministry, according to officials, has already obtained the opinion of the law ministry and has drafted a Cabinet note for withdrawing 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.

"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 telecom company said in a statement on Wednesday.

Vodafone International Holdings BV, it added, has commenced an international investment arbitration against the Indian government under the bilateral investment treaty between India and the Netherlands.

In February, the Cabinet had 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.

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.