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The Vodafone Group has served a ‘dispute notice’ on the Centre, the first step before it begins international arbitration proceedings under the India-Netherlands bilateral investment treaty against the government’s controversial move to tax the company’s acquisition of Hutchison Essar in 2007.

This is the first formal action initiated by the world’s largest mobile operator since the government included a proposal in last month’s budget to tax overseas transactions involving sale of Indian assets on a retrospective basis.

The proposal has sparked off an international uproar with the UK’s Chancellor of Exchequer George Osborne raising the issue with Finance Minister Pranab Mukherjee, and leading trade bodies representing more than 250,000 companies across the US, Europe and Asia warning that foreign investment flows into the country could be impacted.

The UK-headquartered Vodafone on Tuesday said it had served the ‘notice of dispute’ on Prime Minister Manmohan Singh, who had in a letter to Gordon Brown in February 2010 assured the then UK prime minister that the company would have full protection of the law in India and there would be no retrospective application of taxation.

ET had in its edition dated March 30 reported that Vodafone planned to invoke the bilateral investment pact between India and the Netherlands, as its investments in the country have been done through its Dutch subsidiary.

Vodafone, which faces the daunting prospect of paying around Rs 20,000 crore in tax and penalties, said the proposal to retrospectively bring deals such as its 2007 purchase of Hutchison’s assets in India into the tax net violated “international legal protections granted to it and other international investors”.

Vodafone has asked the government to “abandon or suitably to amend” parts of the proposed law to tax past transactions, even as it added that it would prefer to reach an amicable solution.

“However, if the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders’ interests, including commencing investment treaty arbitration proceedings under the BIT against the Indian government,” the company said in a statement to the London Stock Exchange.

The government’s response to the notice was guarded, but firm. The finance minister said it was Vodafone’s ‘prerogative’ to serve a dispute notice. “We are examining it. After all, they are a legal entity and they are entitled to take any course of action,” Mukherjee said.



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