The Centre has six months – till mid-October – to amicably settle the tax dispute with Netherlands-based Vodafone International Holdings BV (VIH), or face arbitration, say legal experts.
By serving a notice on the Indian Government, VIH, a subsidiary of Vodafone, has acknowledged a tax dispute with Indian authorities on its $11.2-billion deal with Hutchison Whampoa in 2007. The notice was served under the India-Netherlands Bilateral Investment Treaty (BIT).
While the Supreme Court had ruled in favour of Vodafone, the Indian Government now seeks to negate that ruling through retrospective amendments in the Income Tax law.
The BIT applies to direct and indirect investments made by investors of either nation in the other's territory. The BIT says disputes should, if possible, be settled through negotiations. And if it cannot be settled after six months of the notice, it can be submitted to arbitration.
Vodafone faces the prospect of a huge tax bill if the Government enacts the Finance Bill 2012 in the current form. The Bill seeks to make retrospective changes to several provisions in an apparent bid to bring indirect transfers of shares with underlying Indian assets in the income tax net.
The Finance Ministry officials maintain that the objective of the proposed amendments is to clarify that the intent of the law was always to bring indirect transfers under the tax net.
However, some lawyers do not see it as a mere clarificatory change, but a significant change in the law.
“The clarifications included are in the nature of changes in the law applicable retrospectively and therefore capable of being challenged on grounds of being unconstitutional. In fairness, the law should only be changed prospectively,” said Mr Saket Shukla, Partner at the law firm Phoenix Legal.
This is not the first time that VIH is using bilateral agreements to settle the issue in its favour.
Earlier, the Netherlands authorities had written to the Indian Government for invoking Mutual Agreement Procedure (or MAP, an alternate dispute resolution mechanism) under the Bilateral tax Treaty. However, such efforts did not yield any results.
According to lawyers, if India loses the arbitration (in the wake of BIT being invoked) and fails to compensate VIH, the company can even cite the award and get India's assets abroad attached.
Dr K.M. Gopakumar, legal adviser to the Third World Network, said, “It will be very difficult for India not to comply with the award if it loses the arbitration. Non-compliance can lead to attachment of India's properties anywhere abroad.”
“In a similar matter, a US court had ordered the attachment of Argentina's assets worth around $3.1 billion in the US after Argentina lost a case to two investment firms,” he pointed out.
He added that it is time that India reviews the BITs to ensure that its policy space on taxation measures is not curtailed.