The government has appointed international arbitration expert Rodrigo Oreamuno from San Jose, Costa Rica, to represent it in the tax dispute with Vodafone over its 2007 acquisition of Hutchison Essar that led to the British telecom giant’s entry into the Indian telecom market.
Oreamuno served as vice-president of Costa Rica for four years from 1994 and before that was the president of the country’s bar association. He and Vodafone nominee Yves Fortier of Canada would now decide on a neutral chairman for the arbitration tribunal. Arbitration would happen in a country other than India and Netherlands, where Vodafone International Holdings (VIH), the Dutch subsidiary of the telecom giant that puchased Hutch Essar, is incorporated. The company had acquired Hutch Essar for $11 billion, leading to capital gains tax claims from the Indian authorities.
The appointment of a new arbitrator was necessitated after earlier nominee former chief justice RC Lahoti recently resigned from the post. Also, the previously agreed upon neutral chairman for the tribunal — Abdulqawi Ahmed Yusuf of the International Court of Justice — had declined to accept the offer.
“There are distinct advantages to both an Indian national and a non-Indian national serving as the arbitrator. While an Indian national arbitrator would be more accessible, a non-Indian national arbitrator could be a bit more experienced in international arbitration processes,” said a person privy to the development.
The principal tax demand in the case was Rs 7,900 crore, but Vodafone recently said that its Dutch arm was reminded in 2013 that the updated tax demand (including interest and penalty) was Rs 14,200 crore.
The Supreme Court had in 2012 January struck down the tax demand over Hutch Essar acquisition as not payable, but the previous UPA regime led by Congress amended the Income Tax Act that year to clarify that transfer of shares of companies incorporated outside India, which derive their value substantially from assets situated in India, was taxable here. The clarification, which had retrospective effect, drew sharp criticism from investors.
While the arbitration process is gradually picking up pace, the income tax department recently asked VIH to file fresh tax returns for assessment years 2008-09 and 2009-10 under Section 148 of the Income Tax Act. This is seen by many as the first step towards a reassessment to capture the disputed tax dues.
Finance minister Arun Jaitley has on many occasions said that although the Modi government was not in favour of retrospective amendments to the law, the law would indeed take its course in tax disputes that were legacy issues and were either under arbitration or in the process of completing assessments.
Vodafone’s tax dispute is one of the nearly three dozen disputes pending at various stages, some of them at different high courts, arising from India’s pursuit to of capital gains arising from offshore share transactions resulting in transfer of Indian assets.
Vodafone Group chairman Gerard Kleisterlee was quoted in the company’s annual report saying that “regulatory challenges” in India were hampering its economic development but the country offered a good long-term investment opportunity for global firms.