The government of India has said that an international arbitration tribunal’s order in the Vodafone case impinges on its sovereign right to tax, in a strong indication that last month’s ruling was unacceptable to the Centre and may not be immediately implemented.
The government may either challenge the order, which cited a violation of the India-Netherlands Bilateral Investment Protection Agreement (BIPA) or may not implement it, sources said. A senior official said a final view, based on legal opinion, is yet to be taken.
“While we have said that India is against retrospective taxation, a bilateral investment agreement is for protection and facilitation of investment. It has nothing to do with tax policy… A tax claim cannot be used to invoke BIPA,” said the source. Another officer indicated that the government may challenge the order in the Singapore High Court and pointed to cases involving other countries, such as one related to mining, which had been successfully challenged in the island nation and upheld by the Court of Appeals.
“These tribunals cannot be a super state and decide on what is in the exclusive domain of Parliament or courts,” the second official said. Government sources argued that the acquisition involved controlling interest over Hutch Whampoa’s telecom assets in India with the deal structured in a way that Vodafone and the Hong Kong entity undertook the transaction via foreign entities, to escape tax in the country. While pointing out that the Bombay High Court had ruled in the government's favour on Vodafone’s failure to deduct capital gains tax, an official said, Parliament had opted to “clarify” on the issue through the amendment.
“Instead of seeking legal recourse in India, which was available, Vodafone opted to move the international tribunal invoking provisions of the bilateral treaty on fair treatment,” a senior officer said, reiterating that it was the legislature’s right to clarify a tax issue.
Government sources said that it was important to seek a legal recourse in the Vodafone case as in future too companies may invoke BIPA provisions on other aspects. In fact, some of the companies hit by the cancellation of 2G telecom licenses had also sought arbitration as was the case with Devas-Antrix.
