Once the Cabinet approves this, the taxman will formally try to collect the R20,000 crore tax demand from Vodafone, while the latter will once again seek the protection of the Indo-Netherlands bilateral investment protection agreement (BIPA).
The finance ministrys proposal to the Cabinet asking to end the informal talks, which has the concurrence of the law ministry, follows a Vodafone letter of November 26, 2013, which said the telco would formally be updating its notice of dispute under BIPA. This was followed up by a supplementary notice on January, 15, by Vodafone International under BIPA.
The crux of the talks failing is the R3,700-crore tax demand on the Hutch shares owned by Analjit Singh and Asim Ghosh, which were transferred to Vodafone India as part of Vodafone Plcs overall R11,000-crore deal in 2007. While Vodafone argued that this tax matter was part of the original tax dispute, the finance ministrys view has been that the two are separate. Vodafone argued with the ministry that even the Supreme Court judgment had made it clear that since no shares had changed hands, no tax was due para 88 of the Supreme Court judgment says call and put options were not transferred via share purchase agreement dated 11.02.2007 or any other document whatsoever.
The finance ministry has argued that the Vodafone India case is in any case before the Income Tax Appellate Tribunal and so cannot be a subject of conciliation anyway. The ministry has also argued that the Vodafone India tax argument seems an afterthought and an attempt by Vodafone Plc to get out of the informal conciliation since in its original April 17, 2012, notice of dispute, Vodafone Plc had not mentioned the Vodafone India tax case.
The dispute over including the Vodafone India tax case has been going on since June last year.
While the government through various letters reiterated that the Vodafone India case could not be included in the conciliation, Vodafone insisted they were linked.
The I-T department may proceed as per the provisions of the Income Tax Act to collect the outstanding demand from the company, the law ministry said in its comment on the Cabinet note. The Cabinet is expected to discuss the case soon.
Vodafone did not comment on the latest development.
The two sides have been exploring options to resolve the tax dispute arising out the companys Rs 11,000-crore buyout of Hutchisons 67% stake in Hutch-Essar in 2007. Although Vodafone had won the case in the Supreme Court in January 2012, the government had, through a retrospective amendment in the Income Tax Act, revived the demand.
While the basic tax demand for the 2007 acquisition is Rs 7,990 crore, the outstanding dues, including a penalty of a similar amount and accrued interest, run into Rs 20,000 crore.
An Income Tax department official told FE on the scenario post the break-up of the conciliation talks: Our renewed tax demand to Vodafone from this transaction came into existence on the date of the retrospective amendment of the Income Tax Act. It is for the entire tax demand including interest and penalty. The Parthasarathi Shome Committee recommendation that tax demands following the retrospective amendment of the law should not contain interest and penalty does not apply to the tax demand raised in this case unless the Central Board of Direct Taxes decides to issue a circular in this regard.
On the transfer pricing issue issue where the I-T department has raised a tax demand of Rs 3,700 crore, the Income Tax Appellate Tribunal has given a relief to the company from payment. However, it has asked it to pay Rs 200 crore in two tranches, by February 15, apart from furnishing a corporate guarantee undertaking to pay up the entire taxable amount of Rs 3,700 crore in case it loses in a transfer pricing case relating to assignment of call options relating to the year 2007. The next hearing on the matter comes up on March 19.
The notice to pay Rs 3,700 crore in a transfer pricing case was served on Vodafone in December 2013 after the Dispute Resolution Panel, a collegium of three Income Tax commissioners which decides on disputes relating to tax matters, ruled in favour of the revenue department. The tax notice was for the assessment year 2008-09.
The case relates to its Indian unit Vodafone India Services Ltd which had written agreements (call options) with Max group chairman Analjit Singh and Vodafones former CEO Asim Ghosh to buy their shares in the company. Prior to Vodafone, Hutchison, which held the majority stake in the then Hutch-Essar had this agreement which was transferred to Vodafone when in February 2007 it acquired Hutchisons 67% stake in the joint venture firm.
The Income Tax department raised the tax demand stating that the share transfer by Singh and Ghosh had taken place in 2007 to VISPL. However, the company disputes this stating that it simply had an agreement but no transaction was done so theres no tax payable in the matter. Company sources said that the matter was part of the overall Rs 11,000 crore tax case which the company fought against the revenue department in the Supreme Court and won.