Vodafone notice on arbitration premature: Govt

The government has replied to Vodafone's notice that threatened international arbitration, saying there was no cause of action. It may send a reply and a tax notice to the company after the Finance Act is notified in the official gazette.

"We have replied to Vodafone saying there is no cause of action because no law had been amended...It is premature on behalf of Vodafone," said a finance ministry official.

Earlier in the day, finance Minister Pranab Mukherjee had said the Income Tax Department would not reopen cases in which assessment proceedings had been finalised before April 1, 2012.

"With regard to retrospective amendments, I gave a commitment in Parliament that CBDT (Central Board of Direct Taxes) will issue a policy circular clarifying cases in which assessment proceedings had been finalised before the first day of April 2012...shall not be reopened," he said.

In April, Vodafone, through its Dutch subsidiary, Vodafone International Holdings BV, had issued a notice to the government under the Bilateral Investment Promotion and Protection Agreement (Bipa) between India and the Netherlands.

It had asked the government to either abandon or amend the retrospective aspects to the Finance Act, 2012, or face arbitration proceedings. "We have refunded Rs 2,500 crore (Rs 25 billion),

as the Supreme Court had ordered. It is premature to invoke the Bipa. As and when amendments take place, we would give a befitting reply," the official added.

An inter-ministerial group, headed by Finance Secretary R S Gujral, was formed to draft a response to Vodafone's notice. The group, comprising secretaries of the Department of Economic Affairs, law ministry, telecom ministry and external affairs ministry, felt taxation issues were not covered under Bipa.

The issue had come to the fore when the government had proposed retrospective amendments in Section 9 of the Income Tax Act to tax indirect transfer of capital assets. It had also put a validation clause on its tax demand on Vodafone, after the Supreme Court had ruled in favour of the company in January.

The amendments, which the finance ministry had termed clarificatory in nature, would also affect a few other deals. The official said eight more companies could receive tax notices for deals structured in manner similar to the Vodafone one. The ministry expects about Rs 40,000 crore (Rs 400 billion) of tax from such deals.

Disputes on capital gains tax on other merger and acquisition deals pending in courts include those on the $150-mn Idea Cellular-AT&T deal, GE's $500-mn deal with Genpact, the $981-mn Mitsui-Vedanta Sesa Goa deal, the SABMiller-Fosters deal and the $770-mn Sanofi Aventis-Shantha Biotech deal.