Is Vodafone barking up the wrong tree on arbitration?

by R Jagannathan

What’s Vodafone trying to convey by sending the government of India a notice under the India-Netherlands Bilateral Investment Treaty (BIT)? Has it jumped the gun?

Sure, there is likely to be a tax dispute between the government and Vodafone once the Finance Bill, which seeks to make taxation of indirect transfers of underlying Indian assets retrospective, is passed.

Vodafone bought Hutchison Essar’s stake in the Indian operations through Netherlands-headquartered Vodafone International Holdings BV in 2007. Hutchison’s holdings were housed in a Cayman Islands holding company. The Supreme Court held this January that such entirely offshore transactions cannot be taxed in India as the Income Tax Act does not permit it.

The Finance Bill, which seeks to change this through a retrospective “clarification,” is still to be passed.

The legal point is this: till the law is passed, Vodafone is official victor, since the Supreme Court has refused to entertain the government’s review petition.

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[caption id=“attachment_281239” align=“alignleft” width=“380” caption=“Vodafone bought Hutchison Essar’s stake in the Indian operations through Netherlands-headquartered Vodafone International Holdings BV in 2007.AFP”]  [/caption]

Once the Bill is passed, Vodafone can again go to court. How can the Indo-Netherlands Treaty, which provides for arbitration in case the two parties cannot come to an agreement on the dispute, come into the picture till the court process is finally over?

Firstpost asked Rajeev Dhawan, a senior Supreme Court lawyer, and he was clear that “The notice by Vodafone is a ruse to maintain status quo. They obviously don’t want money to be claimed by the government of India, and so they are buying time.”

Vodafone’s gambit seems flawed and is probably being used as a pressure tactic to formally declare the future tax demand as a “dispute” which can then be discussed and then be sent for arbitration.

However, the government is unlikely to fall into this trap till the Finance Bill is passed. Once it is, Vodafone’s only remedy is to move the courts once more, where it may win or lose.

Experts also wonder how the BIT can be invoked when the issue in question is not expropriation of Vodafone’s assets without due compensation, but really about taxes owed to the government? In tax cases, no sovereign will allow external arbitration, and no company can hope to use the process to nullify the tax if the Supreme Court now says it is okay.

As Dhawan points out, “any liability owed to the state cannot be a matter of arbitration under the Revenue Law.”

A BusinessLine story, however, paints a different picture. Now that the notice has been served under BIT, the centre has to resolve the dispute amicably within six months. If not, it could face arbitration.

The report raises a dire spectre if the arbitration goes against India. It quotes KM Gopakumar, legal adviser to the Third World Network, as saying: “It will be very difficult for India not to comply with the award if it loses the arbitration. Non-compliance can lead to attachment of India’s properties anywhere abroad. In a similar matter, a US court had ordered the attachment of Argentina’s assets worth around $3.1 billion in the US after Argentina lost a case to two investment firms.”

The US, of course, can do anything, given its superpower status. But as a Netherlands-headquartered shell company with British nationality, Vodafone’s clout will have to come from the relative political muscle-flexing by these two countries.

But it is not easy to visualise India kowtowing to British pressure if the Supreme Court rules in the government’s favour this time. If it doesn’t, of course, it would be another story.

(Additional reporting by Sindhu Bhattacharya)