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Finance ministry seeks Attorney General’s opinion on right to appeal in Vodafone tax ruling

According to government sources, “The finance minister Nirmala Sitharaman on October 8 took her first review meeting on the Vodafone tax matter, post which the government decided to seek Attorney General’s opinion on the possible legal option of appealing in the matter.”

The government was taken by surprise when the Permanent Court of Arbitration in Hague held that the conduct of the Indian authorities was in breach of “fair and equitable” treatment assured under the Bilateral Investment Treaty (BIT), signed between The Netherlands and India.

However, as an initial response on the matter, the finance ministry in a statement had said, “It has just been informed that the award in the arbitration case invoked by Vodafone International Holding BV against the Government of India has been passed. The government will be studying the award and all its aspects carefully in consultation with our counsels. After such consultations, the government will consider all options and make a decision on the further course of action including legal remedies before appropriate fora.”

Post this, sources privy to the developments had indicated CNBC-TV18 that the North Block is not silent on the subject and is rather exploring all legal options available.

But, now, according to multiple people familiar with the development, the finance ministry will decide the possibility of appeal against the Vodafone arbitration award, only post it gets Attorney General’s opinion on the matter. The appeal will also be decided at the highest political level as it will be the sovereign which will be contesting this case, government sources added.

Meanwhile, “Finance ministry has already started scouting for law firms in Singapore to represent India in case of arbitration appeal,” sources in the know told CNBC-TV18. India has just three months to appeal to the Singapore High Court against the Vodafone arbitration award.

On the other hand, government sources shared that “the income tax department has decided to fast track the pending tax assessment of stake sale by Essar to Vodafone.”

Government sources said the tax department has been told to close the pending assessment of the seller, which in this case is Essar. The tax department will now close the pending assessment to ensure that the actual due recovery is made from Essar, who sold the shares to Vodafone.

The finance ministry sources on September 25 had told CNBC-TV18 that “there is no question of India losing Rs 20,000 crore in Vodafone tax case as reported in some sections of the media.”

Sources had clarified that since Vodafone had not paid the tax demand of Rs 7,900 crore and interest and penalty on it, the question of India losing Rs 20,000 crore does not arise. Also, the tribunal has not accepted the claim of Vodafone for the award of damages.

The finance ministry sources had then acknowledged that “the arbitration tribunal vide its order dated September 25, 2020, ruled in favour of Vodafone and held that the tax demand raised by the Indian income tax department on the basis of the retrospective amendment is in violation India-Netherlands BIPA.”

According to sources, on September 25, as reported by CNBC-TV18, the tribunal has directed India to bear 60 percent of the cost incurred by Vodafone towards legal representation and assistance, which comes to 43,27,294.50 pounds plus 50 percent of the fees paid by Vodafone to the appointing authority, which comes to 3,000 euros. Thus, the total cost of reimbursement works out to around Rs 40 crore. In addition, an amount of Rs 44.74 crore collected from Vodafone needs to be refunded in pursuance of the order of the arbitration tribunal. Thus, the total outgo on account of this award is estimated to be around Rs 85 crore.

In February 2007, Vodafone International Holding (a Netherland Company) had purchased 100 percent shares of CGP Investments (Holding) Ltd (CGP Ltd) (a Cayman Islands Company) for $11.1 billion from Hutchison Telecommunications International Limited. CGP indirectly controlled 67 percent of Hutchison Essar Limited (HEL Ltd) – an Indian company. Hence, through this acquisition, Vodafone got control over an Indian company -Hutchison Essar Limited.

Sources said it was argued by Vodafone that this transaction is not liable for tax in India as the asset transferred i.e. shares of CGP Ltd are the shares of the Cayman Island company and hence it’s not shares of an Indian company. The income tax department felt that such indirect transfer was designed only to avoid capital gain tax in India, it raised a demand of around Rs 7,900 crore by holding that the said transfer of shares of CGP Ltd involves the indirect transfer of Indian assets, i.e., shares of HEL Ltd.

To watch out now is what is the Attorney General’s opinion and what will the finance ministry decides on its right to appeal, based on the legal opinion it receives. Also, crucial will be the move by the tax department on the assessment order for Essar. CNBCTV18

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