The revenue department reckons Vodafone will approach ICJ to put pressure on India to agree for arbitration to settle the roughly Rs 20,000-crore tax dispute arising from Vodafones purchase of Hutch Essar in 2007 for $11 billion.
The sources said the department has prepared a response to Vodafones notice of arbitration, explaining that taxation is not a subject on which India is bound to provide fair and equitable treatment under Article 4 of the India-Netherlands Bilateral Investment Protection Agreement that speaks of national treatment and most favoured nation treatment for foreign investors.
Under law, Netherlands-based Vodafone International Holdings, which issued arbitration notice to India in April, can approach Judge Peter Tomka, president of the ICJ to make necessary appointments if India does not appoint an arbitrator by June 17. India, as reported by FE earlier, does not intend to appoint arbitrators for the dispute.
Outgoing finance minister P Chidambaram said on May 12 that Vodafone had initiated arbitration against the Indian government without waiting for the Income Tax Appellate Tribunal decision on another transfer pricing dispute that was seen as a hurdle to engaging in conciliation talks.
Once the Cabinet clears the response (to Vodafone's arbitration notice), we shall communicate it to them, said a person privy to the development, adding, the matter will be put up before the finance minister in the Narendra Modi government, after he assumes office.
Given the hefty tax demands received by multinationals operating in India mostly in terms of transfer pricing adjustments but a clutch of them being regarding cross-border deals involving Indian assets the BJP's election manifesto, it may be noted, has iterated the need for tax regime non-adversarial to investors.
The International Court of Justice, a UN arm, has been adjudicating mainly on issues of sovereignty and territorial disputes, interpretation of treaties and legality of use of force by one state on another.
On April 24, Marshall Islands made news by filing lawsuits at the Hague against India and 8 other nuclear armed nations including the US and the UK on issues relating to nuclear disarmament.
Vodafone considers the tax dispute as a principal risk factor that could expose it to additional tax liabilities.
In spite of the positive India Supreme Court decision relating to an ongoing tax case in India, the Indian government has introduced retrospective tax legislation which would, in effect, overturn the Courts decision and has raised challenges around the pricing of capital transactions.
Such or similar types of action in other jurisdictions, including changes in local or international tax rules or new challenges by tax authorities, may expose us to significant additional tax liabilities which would affect the results of the business, the company said in its annual report for 2013.
The Union Cabinet wanted the transfer pricing dispute to be settled first so that conciliation talks with Vodafone on the Hutchison Essar deal could go ahead. Vodafone, however, informed the government that it saw no merit in reviewing the matter of conciliation on receipt of the ITAT decision, leading to a breakdown of attempts at conciliation.
Meanwhile, another multinational company, Nokia, served an arbitration notice on India relating to tax demands.