Was Modi kept in the dark about moves in the Vodafone tax battle?

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Revenue Secretary Dr Hasmukh Adhia (centre), a key player in arbitration on the Vodafone tax case, talks at a press conference in New Delhi in July 2017. Photo: Wikipedia

India’s decade-long battle to collect Rs 400 billion in tax from telecom giant Vodafone – over $6 billion at today’s exchange rates – could be in jeopardy following a round of curious decisions by the Ministry of Finance, according to documents reviewed by Asia Times.

The documents indicate that Finance Secretary Dr Hasmukh Adhia did not send a key rebuttal to the PM’s Office challenging a second arbitration meeting in the UK, as directed by Finance Minister Arun Jaitley in regard to all Vodafone issues.

The case, which has been discussed at an arbitration tribunal in the Netherlands for three years, is slated for a “final hearing” in February 2019. But that looks likely to be delayed as the Indian government is all set to participate in a fresh round of talks in the UK.

The series of events that led the government to participate in fresh talks in the UK, while hearings in the Netherlands were nearing closure, raises questions about several key officials and the possibility that the PM’s Office was kept in the dark about these decisions.

In June 2014, as the newly elected government of Narendra Modi began to settle down, Finance Minister Jaitley took a decision to recuse himself from any decision on the Vodafone tax issue. Jaitley said that as a lawyer he had advised the company on several occasions in the past. He said that in the event of a dispute between different ministries or departments the matter would be “referred to Prime Minister Modi”. However, at a global business summit held in February this year, the finance minister called the bid to tax Vodafone retrospectively an “erroneous decision”.

The issue goes back to March 2007, when Vodafone International Holdings BV entered the Indian telecom market and picked up a 52% stake in Hutchinson Essar. Since the entire deal took place in the Cayman Islands, India couldn’t impose any capital gains tax. But in early 2008, the Indian government issued a tax demand, under the Income Tax Act stating that Vodafone had an obligation to pay tax, since an Indian asset had been transferred and profit was made by Hutchinson Telecom International. Vodafone challenged the order in the Bombay High Court, which dismissed the petition in late 2008 on grounds that any company with a presence in India has to pay tax.

Vodafone challenged the order in the Supreme Court, which ruled in its favor in January 2012. The Supreme Court ruled that the tax authorities had issued the demand under a non-existent law, and therefore, it was not valid. The government promptly amended the Income Tax Act in the union budget of 2012 and made such a demand legal with retrospective effect.

A mysterious “former colleague”

In May 2017, a note issued by the finance minister to Nripendra Misra, the PM’s principal secretary, sparked a curious set of events. Jaitley said that “a former colleague from the legal fraternity” gave him a note on the 23 cases under arbitration through various bilateral treaties, in which the “Government of India is not being adequately represented.” The identity of this “former colleague” has never been disclosed.

But the note discussed the Vodafone tax issue and gave various recommendations. Meanwhile, the department of revenue, which oversees all tax-related issues, started a process to prepare a detailed five-page rebuttal to the note prepared by this mysterious “former colleague from the legal fraternity”.

The government files two distinct components on every decision that it has to make. One is “Notings” recording all internal deliberations of the ministry involved. The other is “Correspondence”. According to at least three income tax officials, the Revenue Department note was debated extensively in the “Notings” file. “The issues raised in the note sent by the [finance minister] was erroneous and it was decided internally that the PM’s Office must be informed about the facts. This was discussed elaborately and a draft rebuttal was put up to the Revenue Secretary, Dr Hasmukh Adhia,” one official familiar with the issue told Asia Times.

PM’s Office kept in the dark?

Strangely, the five-page note with nine detailed paragraphs was never sent to the PM’s Principal Secretary.

The rebuttal notes that the government’s Inter-Ministerial Group set up to look at all issues related to the Vodafone dispute took a decision that consenting to more than one international arbitration in respect to a purported investment would create a precedent for multiple arbitration hearings. This, the rebuttal note, said was a flagrant abuse of process.

Interestingly, the income tax department approached the Delhi High Court to get a stay on the notice of arbitration in the UK dated January 24, 2017. In an order delivered on August 22 last year the High Court ruled that [a second round of] arbitration could not start in the UK, but a panel could be constituted while it was considering the issue.

Interestingly, the decision to go to the Delhi High Court went through several hoops, finance ministry officials revealed. It was first sent to the Attorney General of India, who did not share an opinion. It was then sent to the Solicitor General, who agreed that there was a case. The Indian government filed an appeal in the Supreme Court, which ruled that an arbitration tribunal could be constituted in the UK, but proceedings could start once the High Court had ruled on the matter.

At no stage were the views of the Income Tax department shared with the prime minister and the draft note remained in the files, sources said. Asia Times sought comments from the union finance secretary, Dr Adhia. Some of the queries were:

1. Who is the “former colleague from the legal fraternity” who gave the note to the Finance Minister on the Vodafone international arbitration issue?

2. Did the advocate who gave the note to the finance minister consult for the Vodafone in this case or any other matters in the past?

3. Did the Income Tax Department take a position on the starting of a second round of arbitration in the UK? If so, was this referred to the PM’s Office, as per minister’s earlier note?

4. If the note was referred to the PM’s Office, what was their stance? Did they approve a second round of arbitration in the UK?

Dr Adhia relayed the queries to the media coordinator for the Income Tax Department, which issued a detailed backgrounder to the case. However, it reiterated that “India has taken the position that tax matters are not covered under Investment Treaty arbitration and that the initiation of a second arbitration proceeding is an abuse of process. There has not been any change in the stand taken by the Department of Revenue in this case”.

However, the statement did not shed any light who Jaitley’s “colleague from the legal fraternity” is, or why the draft rebuttal was never sent to the PM’s Office. It also did not clarify whether the PM or his principal secretary was notified about this contentious issue.

The story will be updated if the ministry or tax authorities respond to these matters.

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