No end to Vodafone tax dispute impasse

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Wednesday, February 19, 2014
Published On: 20:38:38 PM

The tax dispute between the Centre and the U.K.-based Vodafone is getting more complicated. Though the telecom major on Wednesday reiterated that transfer pricing issue had to be included in overall tax dispute related to its purchase of Hutchinson’s share in erstwhile Hutchison Essar, the Union Finance Ministry had indicated that it was ready to restart the conciliation talks but without clubbing the two issues.

Though Union Finance Minister P. Chidambaram on Tuesday said it was up to the Revenue Department to enforce the Rs.20,000 crore tax notice on Vodafone, government sources said the Centre still wanted to begin conciliation talks if Vodafone made up its mind.

The conciliation talks had broken down after Vodafone issued a supplementary notice to the government, invoking the Bilateral Investment Promotion and Protection Agreement (BIPA) and demanded that a separate transfer pricing case be clubbed with the capital gains tax matter.

On the other hand, the Finance Ministry has already circulated a draft Cabinet note withdrawing the conciliation offer to Vodafone. In June last year, the Union Cabinet had approved a Finance Ministry proposal to go in for conciliation with Vodafone to resolve the capital gains tax dispute related to its acquisition of Hutchison’s stake in Hutchison Essar in 2007. While the basic tax demand for the acquisition is Rs.7,990 crore, outstanding dues, including a penalty of a similar amount and accrued interest, run into Rs.20,000 crore. But Vodafone wants to club a Rs.3,700 crore transfer pricing case of BPO arm Vodafone India Services (VISPL) with the capital gains tax issue, which has been declined by the Finance Ministry.

'The VISPL transfer pricing dispute on the alleged options transfer is entirely included within the dispute about tax on the Hutchison Essar sale and, as such, is included in VIHBV’s notices of Bilateral Investment Treaty claims against the Government of India…In seeking to tax the full value of the Hutchison Essar sale and then to claim tax on an alleged transfer of options in the Hutchison Essar sale, the Government is seeking to tax one event twice,' the telecom major said in a statement on Wednesday.

'Vodafone entered into discussions with the Indian government in good faith and with a desire, as one of India’s largest international investors, to achieve a fair outcome acceptable to both parties…From the outset of the discussions, Vodafone has made it clear that any negotiated resolution would need to encompass all aspects of the Hutchison Essar sale considered by the Supreme Court in reaching its verdict in 2012,' it noted.

'The Supreme Court examined the Hutchison structure in great detail and concluded that there was no transfer or assignment of call options in the Hutchison Essar sale. The Supreme Court had ruled in Vodafone’s favour in 2012, saying it was not liable to pay any tax over the acquisition of assets in India from Hong Kong-based Hutchison. The government changed the rules later in 2012 to enable it to make retrospective tax claims on concluded deals,' it added.

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