NEW DELHI (TIP): Conciliation talks between the Centre and Vodafone over a Rs 20,000 crore tax dispute have failed as the British telecom giant has decided to serve an arbitration notice to the government, a move which shuts out any possibility of a resolution through talks.

The government had decided to withdraw its conciliation offer made to the telecom major for settling the nagging tax demand that arose from its 2007 acquisition of Hutchison Whampoa’s stake in Hutchison Essar. “Vodafone confirms that Vodafone International Holdings BV (VIHBV) has commenced an international investment arbitration against the Indian government under the Bilateral Investment Treaty (BIT) between India and the Netherlands,” a spokesperson for Vodafone Plc said in a statement from the company’s headquarter in London.

“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 spokesperson said. The arbitration notice was served on April 17, and Vodafone is understood to have settled for London as the venue for pursuing the case. Agency reports said the finance ministry had already moved a Cabinet note for withdrawal of the non-binding conciliation offer it had made to Vodafone in June last year.

The telecom company has been given two months for response, which effectively means that arbitration would have to be handled by the new government, which takes charge after the general elections in mid-May. The Cabinet had on February 28 decided to 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, however, said it wants to move ahead with the arbitration without waiting for the ITAT decision on the Rs 3,700 crore transfer-pricing case. The Supreme Court had ruled in Vodafone’s favour on the capital gains tax issue in 2012, saying it was not liable to pay any tax over the acquisition of assets in India from the Hong Kong-based Hutchison. However, the government went ahead with its plans to collect the tax by changing the rules to claim tax retrospectively.

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“The BIT arbitration arises from the government’s 2012 enactment of retrospective taxation on VIHBV’s acquisition of indirect interests in Hutchison Essar, which the Supreme Court held was not taxable under the law at the time,” the Vodafone spokesperson said. In June last year, the Cabinet had approved a finance ministry proposal to go in for conciliation with Vodafone to resolve the capital gains tax dispute.

While the basic tax demand is Rs 7,990 crore, the total outstanding comes at around 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.

This had followed a notice under the Bilateral Investment Promotion and Protection Agreement (BIPA) by Vodafone International Holdings BV to the government over the tax dispute. It said the amendment to the I-T Act will cause VIHBV substantial financial loss. The finance ministry has insisted that the tax case does not fall within the ambit of the India-Netherlands BIPA.

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