Vodafone may press for arbitration

Internationally,Vodafone may invoke BIPA but in India it may have to wait for a fresh tax demand

UK-headquartered Vodafone is likely to press for arbitration proceedings with India as provided for under the India-Netherlands Bilateral Investment Promotion and Protection Agreement BIPA since the Finance Bill,2012 reflects the governments intention to impose capital gains tax of almost Rs 12,000 crore on Vodafone International Holdings a company registered in the Netherlands purchase of Hutchisons 67 per cent stake in the Indian operations. India signed a BIPA with the Netherlands on December 1,1996.

In a statement today,Vodafone said,We can confirm that we are urgently considering a number of courses of action,both in India and internationally,in consultation with our advisors and we continue to discuss these issues with a wide range of stakeholders both in India and internationally.

According to sources,Vodafone need not wait for a fresh tax demand from the Indian revenue authorities to seek compensation for the liability that may arise out of a fresh tax demand.

The Finance Bill,2012 has been recommended to Parliament by the finance minister. It states the intent to tax Vodafone-Hutch transaction, said a source who did not wish to be quoted.

The proposed Clause 113 under Section 9 of Finance Bill,2012,provides for validation of tax demands including that on capital gains raised on companies registered outside India irrespective of any court judgement.

While internationally,Vodafone may press for arbitration proceedings by invoking the BIPA,domestically,it may have to wait for the finance ministry to raise a fresh tax demand. This can happen only after the Finance Bill,2012 received the Presidents assent. If it is suggested that BIPA treaty can be invoked only after the Finance Bill is enacted,then so be it, the source said.

The sources said Vodafone International Holdings BV does not have any assets in India. Its stake in the Indian venture is routed in a pyramid structure through two companies,one in Cayman Islands and the other in Mauritius. India has a Double Taxation Avoidance Agreement with Mauritius too,they said.

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In its statement,Vodafone said that the proposed changes that seek to apply tax liabilities on a retrospective basis were grossly unjust. Furthermore,we would stress again that Vodafone was the acquirer in this transaction. The company made no capital gain whatsoever. Given the clarity of the Indian law in force in 2007,there was no legal basis to withhold tax, it said.

The statement said that the proposed changes in the Finance Bill fundamentally contradict the firm conclusions of the apex court.