Vodafone case: Taxman kept on hold, line left open on conciliation

fe Bureau Posted online: Friday, Feb 28, 2014 at 0000 hrs
New Delhi : In a surprise development, the government on Friday decided not to call off in haste the conciliation process with Vodafone over the Rs 20,000-crore tax dispute. Instead, the Union Cabinet decided to instruct the Income Tax Appellate Tribunal and Vodafone to expeditiously resolve the Rs 3,700-crore transfer pricing case, which was the reason for the breakdown in talks over conciliation.

With the general election around the corner, the government also sought to be generous to the electorate on Friday, approving similar hikes in dearness allowance (DA) for employees and dearness relief (DR) for pensioners effective January 2014 in what would together cost the exchequer an annual Rs 11,074 crore. The hike in DA and DR from 90% of basic salary to 100% would benefit over 50 lakh central government employees and 30 lakh pensioners.

Government and PSU employees have more reasons to cheer. The Cabinet on Friday also set the terms of reference for the Seventh Pay Commission headed by justice AK Mathur and said the panel would review the pay structure with a view to “attracting suitable talent” in public services and improving governance. The Sixth Pay Commission proposals implemented since 2008, it may be noted, raised the government’s wage bill by Rs 22,000 crore annually.

Also, the government has approved the proposal to ensure Rs 1,000 minimum monthly pension under the Employees’ Pension Scheme-95, run by the Employees’ Provident Fund Organisation (EPFO). This would benefit 28 lakh pensioners and cost the government an additional Rs 1,217 crore annually.

Of course, the burden of all these would fall mostly on the next government. The third-quarter GDP date released on Friday revealed a slowing of government consumption growth, reflecting the expenditure squeeze to achieve the fiscal deficit target. The fiscal deficit up to January-end at 101.6% of the full-year revised target indicated tighter control on spending in February-March.

The Cabinet also declared President's rule in Andhra Pradesh, but refrained from announcing the promised special category status for Seemandhra. Friday's heavy-agenda Cabinet meetings also saw clearances coming for the Rs 6,284 crore six-laning of the Eastern Peripheral Expressway in the National Capital Region, which is expected to accelerate economic development in Haryana and Uttar Pradesh beside easing traffic in the capital.

Separately, the Public Private Partnership Appraisal Committee (PPPAC), headed by economic affairs secretary Arvind Mayaram, cleared seven PPP projects worth Rs 16,057 crore, including the Rs 6,571-crore Delhi- Meerut Expressway and the development of an additional liquid bulk terminal at Jawaharlal Nehru Port at a cost of Rs 2,496 crore.

In the Vodafone case, the company had insisted that the transfer pricing case be part of the conciliation process to resolve the overall tax dispute over its 2007 purchase of Huthison's 67% stake in Hutch-Essar. However, the government had contended that the matter is sub judice and hence it could not take a decision regarding clubbing the two.

"The Cabinet has decided not to take any hasty decision regarding a review of the conciliation process. The government has decided to instruct the ITAT (Income Tax Appelllate Tribunal) and Vodafone to expeditiously solve the transfer pricing case. Once that is done, the Cabinet will review the conciliation process," a senior government official said.

The Mumbai ITAT had on Monday adjourned the transfer pricing case to March 19 after Vodafone sought more time in the light of fresh documents filed by the tax department.

Analysts said that the government's decision of not taking a decision on the matter hurriedly is a mature sign since it is better to first wait for the ITAT judgment. “A final decision on the Vodafone issue would impact foreign investments and, therefore, the government needs to move cautiously,” said one.

Had the Cabinet decided to call off the conciliation process, the situation could have got messy with Vodafone moving for international arbitration and the tax department proceeding to recover the claimed dues. The company would have challenged the tax notice in a court of law.

Vodafone has already served a supplementary notice to the government on January 15 under the bilateral investment protection agreement under the India-Netherlands bilateral investment treaty.

According to Vodafone, the government has, in addition to the main tax case, also sought, in a transfer pricing claim to tax an alleged transfer of call options held by a company now called Vodafone India Services Pte Ltd (VISPL) when in fact no such transfer took place — the options were held both before and after the Hutchison Essar sale by the same company. “The Supreme Court examined the Hutchison structure in great detail and concluded that there was no transfer or assignment of call options in the Hutchison Essar sale,” the company has said. “So 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 government is seeking to tax one event twice,” it has added.