By Gireesh Chandra Prasad New Delhi From Financial Express

Vodafone tax case: ICJ vice-president’s walk out begins search for new 3rd abitrator

Vodafone’s purchase of Hutch Essar from CGP Investments of Cayman Islands for $11 billion led to a principal capital gains tax demand of over Rs 8,000 crore.

The resolution of Vodafone’s Rs 20,000-crore tax dispute with the Indian government over the British telecom company’s acquisition of Hutch Essar eight years ago could get delayed further, with the third arbitrator nominated by both the parties declining to accept the assignment.

Sources told FE that Abdulqawi Ahmed Yusuf, vice-president of the International Court of Justice who was named to be the umpire arbitrator, could not take up the task for want of time. Both the parties are now on the lookout for a new third arbitrator who would join the other two — government arbitrator former chief justice of India RC Lahoti and Vodafone nominee Yves Fortier of Canada — on the three-member panel.

Vodafone’s purchase of Hutch Essar from CGP Investments of Cayman Islands for $11 billion led to a principal capital gains tax demand of over R8,000 crore, now over double that on due to penalty and interest over the years.

While arbitration is taking time, the income tax department recently asked Vodafone International Holdings ? the British telecom giant’s Dutch arm that purchased Hutch Essar — to file fresh tax returns for assessment years 2008-09 and 2009-10 under Section 148 of the Income Tax Act.

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This is seen by many as the first step towards a reassessment to capture the disputed tax dues.

The Supreme Court had in 2012 January struck down this tax demand as not payable, but the previous UPA regime led by the Congress party amended the Income Tax Act that year to clarify that transfer of shares of companies incorporated outside India, which derive their value substantially from assets situated in India, was taxable here. The clarification, which had retrospective effect, drew sharp criticism from investors. The current Modi government calls this legal tangle a legacy issue on which it claims to have very limited freedom to interfere.

It recently announced the setting up of a committee led by justice AP Shah to look into another “legacy issue”, the dispute between foreign portfolio investors and the government on their alleged liability to pay minimum alternate tax. The full mandate of the panel is yet to be announced.

Finance minister Arun Jaitley has said on many occasions that his government was not in favour of retrospective amendments to the law, but the tax disputes which were legacy issues were either under arbitration or in the process of completing assessments. The government is likely to let the law take its course on these rather than interfere in them.

The Vodafone tax row is one of the nearly three dozen disputes pending at various stages, some of them at different high courts, arising from India’s pursuit to tax capital gains arising from offshore share transactions resulting in transfer of Indian assets.

Even arbitration is unlikely to help in settling the dispute finally as there is uncertainty on how Vodafone, in case it gets a favourable arbitral award, would enforce it in India with the government maintaining that a sovereign function such as taxation cannot be subject to international arbitration. “Every nation would have a legislation that lays down what is to be done in case there is an international arbitral award. We shall look it up when the time comes,” said a government official, who asked not to be named.

Vodafone recently won two tax disputes involving a tax demand of over R4,800 crore at the Bombay High Court, which ruled that the funds raised by the Indian subsidiary was capital in nature and not taxable income. The government chose not to appeal against it.

Deal distant:

* Government, Vodafone look for new neutral arbitrator

* Vodafone’s Dutch arm asked to file fresh returns for 2008-09, 2009-10

* Centre considers retro tax demands a legacy issue, little scope to interfere

IMAGE: Vodafone’s purchase of Hutch Essar from CGP Investments of Cayman Islands for $11 billion led to a principal capital gains tax demand of over R8,000 crore, now over double that on due to penalty and interest over the years. (Reuters)

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