British telecom major Vodafone Plc on Tuesday served a notice of dispute on the Indian government under the international bilateral investment treaty. It asked the government to abandon or amend retrospective aspects of the proposed Finance Bill 2012 or face arbitration proceedings.
An amendment proposed in the Finance Bill allows Indian revenue authorities to tax foreign transactions that involve Indian assets retrospectively. The 2007 deal whereby Vodafone bought Hutchison’s 67 per cent stake could come under its purview. The company claims the amendment violates international legal protections granted to Vodafone and other international investors in India.
If the Bill is passed, revenue authorities could revive their tax demand on Vodafone, which could force it to shell out over Rs 11,297 crore.
The Supreme Court, in a recent judgement, ruled in favour of the company, saying under the current law, withholding tax on a transaction undertaken overseas between two players could not be imposed. A subsequent review petition by the government was rejected by the apex court.
“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 against the Indian government,” the company said in a press release.
The notice has been sent to Prime Minister Manmohan Singh, who had sent a letter to former UK Prime Minister Gordon Brown in February 2010 to assure him Vodafone would have full protection of the law and there would be no retrospective application of taxation. The notice has also been sent to the finance minister, the law minister and the telecom minister.
The notice was served by the company’s Dutch subsidiary, Vodafone International Holdings BV.
A notice of dispute is the first step required prior to the commencement of investment treaty arbitration under the bilateral investment treaty between India and the Netherlands. The note outlines the nature of the dispute, which arises out of the retrospective legislation in the Finance Bill.
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In a statement, the UK-based telco added, “Vodafone believes the retrospective tax proposals amount to a denial of justice and a breach of the Indian government’s obligations under the treaty to accord fair and equitable treatment to investors.”
Vodafone has stated that under the treaty, the Indian government is obliged, among other things, to accord fair and equitable treatment to investors, provide full protection and security, not breach the legitimate expectations of investors in making investments, not deny justice or breach previously provided assurances and not take steps to indirectly expropiate the investment.
Finance secretary R S Gujral told reporters he was yet to receive the notice. "Let us see the notice and then we'll see. Neither my colleagues nor I have received it so far," he said. He said the intention of the government on retrospective amendments to the Income Tax Act from 1962 was not to trouble anyone. The industry’s concerns would be resolved, he said.
Corporate affairs minister Veerappa Moily told TV channels it was a serious matter, which was also under the consideration of the government. “There are times when retrospective amendments are needed. Retrospective amendments are not new,” said Moily.
In response to these statements, Vodafone said, "The questions raised by Indian ministries cannot be unilaterally decided by India. They would have to be addressed to, and decided by, the arbitral tribunal if it came to that. As noted in our statement this morning, Vodafone would like an amicable outcome to this issue, if achievable.”
Legal experts say there is a clause called unjust expropriation in the bilateral investment treaty. “Vodafone can invoke arbitration proceedings against the Indian government, contending the retrospective amendments will amount to expropriation of its investment. However, the process will be long-drawn and fraught with difficulties since the protection afforded to investments under the treaty is quite narrow and a favourable award, if any, may be open to challenge in Indian courts before it can be enforced,” said Vikas Srivastava, a partner at Luthra & Luthra.
The government has various alternatives. If the investment treaty arbitration is invoked, the government could challenge the jurisdiction of the treaty and the procedure that would be followed, according to experts.
H P Ranina, a senior corporate lawyer, said there was a provision in the treaty wherein compensation could be claimed if the treaty was breached. “The compensation can be higher than the tax claim. But, we'll have to see how all this pans out,” he said.
Apart from such arbitration, the amendment to the Bill itself could face a legal battle, challenging its constitutional validity. This, of course, would happen if the drafted legislation becomes a law.