Dutch govt invokes treaty in Vodafone tax case

Three years of continuous litigation seems to have finally taken its toll on Vodafone.

The Dutch revenue authorities have written to the Indian finance ministry, requesting for discussions in the RS11,200 crore Vodafone tax case.

The Dutch authorities have filed a formal application under mutual agreement procedure (MAP) route, stating that the obligation of Vodafone, as sought to be imposed by the Indian tax department, is inconsistent with the provisions of the India-Dutch tax treaty, according to a government source familiar with the development.

The Dutch authorities had a few weeks ago informally asked the government about invoking MAP in this case.
MAP entitles the competent authority of a country to take up tax disputes on behalf of its taxpayer, with the revenue authorities of the country where the tax payer is facing tax litigation.

In the case of $11 billion Hutch-Vodafone deal, the payment was made by a Netherlands entity of the United Kingdom-headquartered Vodafone group.

However, tax department sources say Vodafone cannot take the shelter of MAP, as the case pertains to an issue falling under the Indian Income tax act and does not involve any element of double taxation.
Noted tax expert T P Ostwal expressed surprise at Vodafone’s application.

“Generally only the taxpayer who is subjected to tax or against whom proceedings have been initiated to tax his income can initiate MAP proceedings. In this case, Hutchison has received the income and they could have initiated MAP, but there is no tax treaty between India and Hong Kong. It is difficult to see how the Indian authorities will accept Vodafone’s MAP application,” said Ostwal.

“Vodafone’s plea under MAP is independent of the ongoing court proceedings. It does not in any manner mean that Vodafone is giving up its right to argue on the aspect of jurisdiction before the Supreme Court,” said Mukesh Butani of BMR Legal.

The income tax department is seeking to recover over Rs11,000 crore in capital gains taxes from Vodafone for failing to deduct tax before making payment of $11 billion to Hutchison for acquiring a 67% stake in Indian telecom company Hutchison Essar (now renamed Vodafone Essar).

But Indian courts have twice rejected Vodafone’s writ petition to dismiss the tax case. The Bombay High Court ruled a couple of months ago that Vodafone acquired an Indian asset and hence should have deducted tax at source on its payment to Hutch.

Vodafone has appealed the ruling to Supreme Court, which ordered Vodafone to deposit Rs2,500 crore till it decides the case.