Govt hits back at Vodafone, terms its notice premature

The finance ministry on Wednesday termed Vodafone's notice to the government on retrospective amendments to the Income Tax Act as 'premature' and based on assumptions.

A finance ministry official said Vodafone had threatened arbitration against something that had not happened. He said the UK-based telecom company was presuming it might happen.

The official said the provision of the Bilateral Investment Promotion and Protection Agreement between India and the Netherlands, under which the notice was served, might not apply to the Vodafone tax case as the investment was routed through the Cayman Islands.

Officials asked why the company sought protection under the BIPA when it had maintained the deal happened outside India.

"The move is premature. The company has every right to take legal recourse, but can you serve a notice on the assumption that there would be a dispute?" asked an official.

The BIPA between India and the Netherlands came into force in December 1996.

When contacted, the company said Vodafone International Holdings BV was a company constituted under the laws of the Netherlands and, therefore, an investor as defined under article 1(d) of the treaty.

The ministry officials ruled out a softening of stance on the Finance Bill proposal to retrospectively amend section 9

of the Income Tax Act for taxation of foreign transactions involving Indian assets.

On Tuesday, Vodafone's Dutch subsidiary, Vodafone International Holdings BV, had served a notice of dispute on the Indian government, asking it to abandon or amend retrospective aspects of the proposed Finance Bill 2012 or face arbitration proceedings.

"Vodafone would prefer to reach an amicable solution to this matter.

"However, if the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders' interests, including commencing investment treaty arbitration proceedings," the company had said in a press release.

The proposals of the Finance Bill are yet to be cleared by Parliament, but indications are the government would stick to its stand and not roll them back under pressure from Vodafone.

Though the government has never said the retrospective amendments were proposed to tax Vodafone after the Supreme Court verdict went in the company's favour, it is widely believed its Rs 11,000-crore (Rs 110-billion) tax demand would be revived after the Bill's passage.

Before such a matter is taken to an international court, six months are given to the parties involved to resolve the matter amicably.

In this case, the government has six months to respond to the notice.

The official said Vodafone could have extended the window to pre-empt the possibility of a tax demand.