Vodafone also warns of trade pact action

Written by fe Bureau | New Delhi | Updated: Mar 31 2012, 08:36am hrs
Vodafone on Friday became the fourth company since January this year to threaten invoking bilateral investment treaties against the Indian government for reneging on international commitments.

The growing list, a sign of global investors losing confidence in the governments ability to stick to commitments, comes at the end of a bleak fiscal for government managers. In telecom, Russias Sistema and Norways Telenor have already served notice of their intentions, while in coal, The Childrens Investment Fund, the second-largest investor in Coal India, has also spoken about its intention.

Though Vodafone has not explicitly stated the invocation of the bilateral treaty India has with Netherlands, its statement on Friday strongly hinted at it. Vodafone's investment in India is through its Netherlands-based subsidiary.

The world's largest mobile firm by revenues is sore at the government's move to amend the law to retrospectively tax its acquisition of Hutchison's stake in Hutch-Essar in February 2007.

The proposed changes in the Finance Bill fundamentally contradict the firm conclusions of the apex court and as such raise important constitutional questions for India as well as widespread and profound concerns in the minds of international investors. We can confirm that we are urgently considering a number of courses of action, both in India and internationally, in consultation with our advisers and we continue to discuss these issues with a wide range of stakeholders both in India and internationally, a statement issued by the UK-based Vodafone said.

Prior to Vodafone, Russia's Sistema which has a joint venture with Shyam in mobile firm Sistema Shyam and Norway's Telenor which has a majority stake in another mobile firm, Uninor served the government notices under bilateral investment pacts between India and Russia and Singapore, respectively. Under them, the government has the option of resolving amicably the dispute with them or they can approach international tribunals. The two firms lost their licences when the Supreme Court in February cancelled 122 licences granted by former telecom minister A Raja in January 2008.

Before 2012, the last time India was embroiled in an international investment dispute was with Enron. But in this calendar year it has already lost a dispute with White Industry of Australia, again involving Coal India.

The dispute between the government and Vodafone, which is the country's third largest mobile operator by subscriber base, is five years old, dating from when the latter acquired Hutchison's 67% stake in the then Hutch-Essar for $11.2 billion. Though the deal was concluded between the Netherlands subsidiary of Vodafone and an overseas entity of Hutchison, the government felt that capital gains tax should have been paid since the underlying assets of the company were in India. After a protracted legal battle the Supreme Court in January ruled in Vodafone's favour that the company was not liable to pay any tax. However, the government in the Budget made a retrospective amendment to the Income Tax Act, 1961, enabling it to tax all such deals between overseas entities where the underlying assets lay in the country. Armed with this legislation the government is set to tax Vodafone's deal with Hutchison.

The company sees this as a breach of India's bilateral investment treaty with Netherlands and plans to claim back equal damages from the government.

Vodafone believes the proposed changes to the Indian taxation regime, as set out in the Finance Bill, are grossly unjust. The proposed changes seek to apply, on a retrospective basis, tax liabilities which explicitly were not countenanced under Indian law in force at the time of the transaction between Vodafone and Hutchison. These facts have been examined in detail by the highest court in the land, which delivered an unambiguous judgment affirming that there is indeed no tax due on the transaction a conclusion reiterated in the Supreme Courts rejection of the Governments recent review petition, the company's statement said.

Furthermore, we would stress again that Vodafone was the acquirer in this transaction. The company made no capital gain whatsoever. Given the clarity of the Indian law in force in 2007, there was no legal basis to withhold tax, it added.