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Govt set to hang up on Vodafone

New Delhi, Feb. 11: The government has decided to halt truce talks with Vodafone on a Rs 7,900-crore tax dispute case and proceed to collect its dues after the UK-based telecom company insisted on bringing transfer pricing disputes within the ambit of negotiations.

In fact, the government’s claim is much higher at Rs 20,000 crore, taking into account penalties and accrued interest.

The finance ministry has floated a draft cabinet note in this regard, sources said, adding the law ministry has backed termination of the conciliation proceedings with the British giant.

Vodafone apparently wants to include in the negotiations a separate case where the tax authorities had frowned upon the prices at which it had sold shares in its India-based BPO arm to another arm in Mauritius. The authorities have slapped a tax based on a “fair value”, which, along with penalties, works out to more than Rs 1,300 crore, officials said.

However, the Indian government has refused to club the tax dispute and the transfer pricing cases. It has also thwarted attempts to shift the arbitration proceedings out of India.

The ministry will move the cabinet, repeating a process undertaken last year when it sought cabinet permission for the conciliation.

The immediate trigger to withdraw the conciliation talks with Vodafone International Holdings BV was a supplementary notice served to the government last month under the Bilateral Investment Promotion and Protection Agreement (Bipa) that India has with the Netherlands, where Vodafone International is registered.

The notice, sources said, shows Vodafone’s reluctance to have conciliation within the scope of the terms approved by the cabinet in June last year.

The revenue department, sources said, would now pursue the tax demand along with accrued interest and penalty.

The income tax department had kept its tax notice to Vodafone in abeyance following the cabinet decision to resolve the tax dispute through non-binding talks.

According to the law ministry, “The stand of Vodafone International Holdings BV is not in consonance with the approval of the cabinet. In view of the divergent stand taken by Vodafone and the Government of India, the conciliation process as approved by the cabinet cannot take place.”

“The income tax department may proceed according to the provisions of the income tax act to collect the outstanding demand from the company.” Vodafone declined to comment on the issue.

Legal experts expect the British company to go ahead with earlier veiled threats to take the dispute to international courts under Bipa.

However, Indian government officials feel this is not an option as the treaty does not cover tax disputes.

The latest attempt at conciliation came after a five-year battle in Indian courts that produced a favourable verdict for Vodafone.

The case arose over the revenue department’s move to gouge out $2 billion in taxes from a $11.2 billion deal between two overseas entities — Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate firms — while selling the Indian arm of Hutch to Vodafone in 2007.

 
 
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