Retrospective tax laws trip up Vodafone again

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If the R10,000-crore tax on its $11.2-billion purchase of Hutch’s India operations wasn’t bad enough, Vodafone has got caught in another retrospective tax case. The company’s R3,434 crore transfer pricing addition case involving its subsidiary, Vodafone India Services Pvt Ltd (VISPL), is also based on a retrospective amendment, this time the one made to the FY12 Finance Act.

Another company to get caught up in the same Act is Shell India Markets and its adjustments to the income works out to R3,137 crore. Both cases pertain to FY10, and both orders were passed on January 29 this year.

The Vodafone case involves its issue of 5.6 lakh shares to Vodafone Tele-Services India Holding Limited, Mauritius in two tranches — one on July 16, 2009, at R7,110 and another on January 24, 2010, at R6,447 each. VISPL has argued these are capital transactions and do not attract Section 92(1) of the Income Tax Act — it is only if the transactions come under Section 92(1) that the next question: of arm’s length pricing — come into effect.

This is where the amendment to the Finance Act of 2012 comes in. As the amendment says, “the current definition of International Transaction leaves scope for its misinterpretation... it is therefore, proposed, to amend Section 92B of the Act... to clarify that the international transaction shall include a transaction of business restructuring … irrespective of the fact that it has bearing on the profits, income, losses or assets… This amendment shall take place retrospectively from April 1, 2002.”

With this retrospective amendment in place, the taxman has determined that instead of getting R392 crore, VISPL should have earned R2,999 crore more since each share was actually worth R60,445.

Add in the interest costs, and the transfer pricing order states that a total of Rs 3,434 crore needs to be added to VISPL’s income for FY10.

In Shell India’s case, there are two types of adjustments, one for the work done by the company in India and one for share transactions of the type Vodafone did. Shell India sold 4.78 crore shares to Shell Gas BV on December 24, 2009 at par value of R10 per share. Given the profits of the company, the valuation report put the share’s value at R2.79 each and Shell India sold them at R10 each. The taxman rejected this saying it did not capture the brand value of Shell or the future business projections – it has a licence for 2,000 petrol pumps and is making big investments on the promise of possible deregulation of the sector, making it the only MNC in India with a license to run gas stations.

Like Vodafone, Shell India too argued the taxman has no jurisdiction as issuing of shares does not add to Shell’s income and is therefore not an international transaction. Shell India has also argued that there is absolutely no difference in its shareholding pattern after the share issue and that the shares were issued primarily to infuse capital.

Once again, the Finance Act of 2012 comes to the rescue and the transfer pricing order makes the same point as in the case of Vodafone. And in the case of Shell, R851 crore have been added to its income by raising the value per share to R187.96 on the basis of this transaction. All told, R3,137 crore has been added as transfer pricing adjustment for FY10, which includes R1,903 crore interest on the short receipt of R15,200 crore associated with FY09 share transaction.

Relief for Vodafone: Cabinet refrains from accepting FinMin proposal to withdraw offer for conciliation

NEW DELHI: The government on Friday signalled that it has not yet shut the door on an amicable settlement with Vodafone Plc over the company's multi-billion-dollar tax dispute with the Union Cabinet refraining from accepting a finance ministry proposal to withdraw the offer for conciliation made to the British telecom major eight months ago.

This gives some reprieve to the telco as withdrawal of the offer would have immediately made the company liable for the Rs 8,000-crore tax demand on its 2007 acquisition of Hutchison Essar that has now swelled to over Rs 20,000 crore as interest and penalty have been added.

"At this stage, we are not withdrawing the conciliation offer to Vodafone," said a finance ministry official, adding that a decision would be taken after the Income-Tax Appellate Tribunal (ITAT) adjudicates on another tax row involving Vodafone.

The Cabinet deferred a decision on the proposal and also directed the finance ministry to request the tribunal to expeditiously hear the transfer pricing case involving a Vodafone group company in India. If Vodafone loses this case, it is liable to cough up an additional Rs 3,700 crore as tax.
"After the ITAT decision, the Cabinet will review the conciliation process," the official said.

Vodafone declined comment on Friday's Cabinet decision.
The finance ministry had moved the Cabinet to withdraw the eight-month-old conciliation offer to Vodafone after the British telecom major insisted on clubbing the transfer pricing case with the negotiations over the original tax dispute.

The British telecom major Vodafone also served New Delhi with a fresh reminder in January under the India-Netherlands bilateral investment promotion agreement.

The company also wanted that conciliation be carried out under the United Nations Commission on International Trade Law (UNCITRAL) and not the Indian Arbitration and Conciliation Act, as it was uncomfortable about submitting to arbitration proceedings under Indian jurisdiction.

The government will soon respond to Vodafone's last month's notice.

The tax row between Vodafone and the government has attracted the attention of international investors and raised questions about India's attractiveness as an investment destination. The dispute has, however, not dissuaded Vodafone from stepping up investments in India.
The company recently raised its stake in its Indian arm to 100% and also bid aggressively in the spectrum auctions that concluded recently.

The origins of the dispute lie in the decision of the Indian tax authorities, a few years ago, to impose a principal tax liability of Rs 7,899.9 crore on Vodafone for failing to deduct tax on its $11-billion payment to Hutchison Telecommunications International for the acquisition of Hutchison Essar (now called Vodafone India).
Source: Economic Times

Vodafone gives new arbitration notice; challenges right to slap Rs 20K-cr retro tax demand

NEW DELHI: Vodafone Plc last month quietly served notice to the Indian government seeking international arbitration over their multi-billion dollar tax dispute, before the finance ministry moved a Cabinet note for withdrawing its conciliation offer to the UK based telecom operator.
Served at the end of January, Vodafone's notice challenges the government's right to slap a Rs 20,000-crore tax demand on it through a retrospective amendment in the Income-Tax Act to tax overseas transfer of assets based in the country. The notice has been served under the India-Netherlands Bilateral Investment Promotion Agreement (BIPA).

The Indian authorities will contest the arbitration on the ground that tax disputes were not covered under the treaty. "They have served another notice. But India-Netherlands BIPA does not cover taxation," a government official privy to the development told ET. Vodafone had earlier served two notices to the government, before the two embarked on a conciliation dialogue.

The government's move to withdraw from a compromise dialogue had surprised most observers but it now transpires that its actions may have been precipitated by Vodafone's notice. Both these developments signal a resumption in hostilities between the two parties over their tax row.
The feud has attracted the attention of international investors and raised questions about India's attractiveness as an investment destination.

The row has, however, not dissuaded Vodafone from stepping up its investment in India. The company recently hiked its stake in its Indian arm to 100 per cent and also bid aggressively in the auctions that concluded last week.

A Vodafone spokesperson said the company cannot comment on "resolution discussions" as it awaited further communication from the government about the status of the talks. "Vodafone has always said it would like to achieve an amicable resolution to this issue, but we cannot agree to any proposal that prejudices our legal position or seeks to tax the same event twice.

  The company will continue to take whatever steps are necessary to protect the interests of its shareholders," said the company spokesperson. But officials aware of developments say little headway had been made as Vodafone first insisted on arbitration under the United Nations Commission on International Trade Law (Uncitral) against the Cabinet's decision of having it under the Indian Arbitration and Conciliation Act and then wanted the talks to be held in an international jurisdiction instead of an Indian city.

It subsequently wanted to include another case relating to a Rs 8,500-crore transfer pricing dispute in the conciliation process, a demand the government did not accept. Vodafone subsequently sent an arbitration notice to the government and the government decided to withdraw its offer.

The origins of the dispute lie in the government's decision, a few years ago, to impose a tax liability of Rs 7,899.9 crore on Vodafone, on the grounds that it had failed to deduct tax on its $11.07-billion payment to Hutchison Telecommunications International for the acquisition of Hutchison Essar (now called Vodafone India).

The tax demand was struck down by the Supreme Court, but the government then amended the law retrospectively in the 2012-13 budget, making the company liable to pay tax. Vodafone served its first arbitration notice to the government in April 2012, but tempers on both sides subsequently cooled down and the two agreed to conciliation discussions last year.

If the matter goes to international arbitration, the government will argue that the India Netherlands BIPA does not cover tax issues. "The provisions of paragraphs 1 and 2 in respect of the grant of national treatment and most favoured nation treatment shall also not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation or arrangements," says paragraph 4 of the treaty.
Source: Economic Times

Vodafone says pricing dispute related to Hutchison’s assets buy

NEW DELHI: Vodafone Group Plc and the government are back on a collision course. The UK telecom major has stuck to its stand that the Rs 8,500-crore transfer pricing dispute is part of the broader tax row related to its purchase of Hutchison's assets and needs to be a part of any conciliation process, a contention which apparently provoked New Delhi to move to call off settlement talks last week.

"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 (Indian) government is seeking to tax one event twice," Vodafone said in a statement on Wednesday. It added that the Supreme Court, as part of its verdict in 2012, had already examined the transfer pricing case in detail and ruled that there was no "transfer or assignment of call options in the Hutchison Essar sale".

Indian tax authorities had imposed a tax liability of Rs 11,200 crore on Vodafone for failing to deduct tax on its $11.07-billion payment to Hutchison Telecommunications International in 2007. While the apex court had ruled in the operator's favour that there was no tax due, the government amended the laws to sidestep the order. Including interest and penalties, the tax liability is now about Rs 20,000 crore. Separately, the tax department also slapped a demand notice in connection with the sale of the call centre business to Hutchison Whampoa Properties India and alleged assignment of call options to a unit.

The transfer pricing dispute on the "alleged options transfer is entirely included within the dispute about tax on the Hutchison Essar sale" and, as such, also forms part of Vodafone's notices of bilateral investment treaty claims against India, the company said.

The war of words marks an unexpected reversal in attempts of the two parties to resolve the issue, which has dented India's image as an investment destination. New Delhi had been working particularly hard to encourage investors, especially from overseas, to invest in the country, especially since growth has slumped to a 10-year low. The tax demand had been kept in abeyance amid the conciliation effort.

Vodafone's comments come a week after it was revealed that the finance ministry is about to move a final Cabinet note withdrawing the conciliation offer which was made about eight months ago. Government officials said that New Delhi's step back came after the UK-based telco wanted the scope of the conciliation talks to be widened to include the transfer pricing dispute. The comments come a day after finance minister P Chidambaram's comments to ET Now that Vodafone's indecision had led to the conciliation process getting stuck.

Vodafone, "buffeted with multiple legal advisors is unable to make up its mind whether it wants to begin conciliation. So I have waited long enough for conciliation to begin, I am willing to wait for a little more time but at some point of time we have to face the reality and say despite the best effort the government, Vodafone is unwilling to begin conciliation," Chidambaram had said.

On Wednesday, Vodafone said it started talks with the government "in good faith and with a desire" and has always responded to New Delhi's queries on time, despite on one occasion India taking six months to reply to one of its letters.

It added that senior Vodafone executives have met ministers and government officials on several occasions in an attempt to resolve the long-standing tax dispute. It said the government rejected all the mobile operator's offers of resolving the impasse, including through established international conciliation mechanisms, such as under the United Nations Commission on International Trade Law.
"Consequently, discussions have focused on seeking to establish whether or not a mechanism existed under Indian law which would allow for the possibility of a negotiated resolution of the tax dispute in a manner which did not prejudice Vodafone's legal rights or the interests of its shareholders and which also took into account the government's own objectives," it said.
Source: Economic Times

Setback to govt’s reconciliation talks with Vodafone

Pradeep Thakur,TNN | Sep 17, 2013, 06.46AM IST
NEW DELHI: The finance ministry's efforts to settle Vodafone's over $2 billion tax dispute through reconciliation has received a setback with the Law Commission likely to tell the government that amendments in the Arbitration and Reconciliation Act, as asked by the law ministry, may not help settle the case out of court.

The law ministry had asked the Law Commission to submit a report on suggestions to amend the Arbitration and Reconciliation Act where cases such as Vodafone's -- arising out of retrospective amendment in the Income Tax (I-T) Act — could be settled avoiding international arbitration.

The British telecom major wanted to settle the tax dispute under the United Nation's Commission on International Trade Law rules which India had rejected. The government had said any settlement would have to be strictly under Indian laws.

Sources in the Law Commission said any settlement with Vodafone could be made either through I-T's settlement commission or an amendment had to be brought in the I-T Act providing for reconciliation and settlement of tax disputes other than through the settlement commission.

Vodafone, however, has refused to go to the I-T's settlement commission as it will lose the right to any international arbitration once it approaches the commission. The government had earlier offered the telecom giant waiver of penalty if it approached the settlement commission and paid the tax dues and interest on it.

Also, if the company approaches the settlement commission, it has to deposit in advance all tax dues and interest on it before the case is listed for hearing. The government though had initiated conciliation talks between Vodafone's representatives and the law secretary.

The Law Commission was asked by the government to frame guidelines on arbitration and reconciliation so that it could bring in amendments in laws which could help it drag some of the multinational companies engaged in tax disputes to Indian courts and subject them to settlement.

The government has been demanding more than Rs 20,000 crore from Vodafone on account of tax, interest and penalty on gains made by Hutchison when it sold its India assets to the company in 2007. The company has, however, refused any offer of settlement of dispute under Indian laws.

At one point, the government was even contemplating bringing in a fresh clause in the retrospective amendment to I-T Act where tax demand raised on past cases could automatically get penalty waiver.

Vodafone had also won a case against the government in the Supreme Court in January 2012 which ruled that capital gains tax was not applicable to the company. The apex court had also asked the government to refund the telecom giant's Rs 2,500 crore with interest which it had paid against the tax dues.