The cobweb of complexities and the maze of unrelenting madness in which the Finance Ministry has tied itself in the Vodafone International Arbitration is a story of how an inept bureaucrat, with arguably limited knowledge of law and taxation, has compromised our national interest. Hasmukh Adhia, to further his naked ambitions, has buried the very idea the Prime Minister Narendra Modi preaches.

Apprehensive of tasting defeat in the arbitration under the Netherlands BIPA, in what is termed as a “devious” move, Vodafone moved for a fresh arbitration under the India-London BIPA.

The Vodafone case, as it is popularly known, involves a tax demand of Rs.11,000 crores ($1.7 billion) on Vodafone, for its Rs.55,000 crores ($8.5 billion) acquisition of a 67 percent stake in Hutchinson Essar Ltd.’s telecom business in India[1]. The interest and penal liabilities, in this case, are Rs.17,000 ($2.6 billion) and Rs.8,000 crores ($1.231 billion) respectively.

Income Tax department lost this case in the Supreme Court and the Government filed a review petition which was also dismissed. The Union Budget, in 2012, retrospectively amended the Income Tax Act 1962 to empower the income tax officers to scrutinize offshore merger and acquisition deals. Vodafone and the Indian Government entered into conciliatory negotiation and dispute settlement mechanism. In June 2013, a non-binding conciliation offer was made to Vodafone by the Indian Government but it did not yield any satisfactory result. The Government, later on, withdrew the offer when in April 2014, Vodafone moved for International Arbitration under the Bilateral Investment Protection Agreement (BIPA) between India and Netherlands. In June 2014, Arun Jaitley recused himself from the proceedings of the Vodafone tax dispute[2] and delegated the decision making in this case to Minister of State for Commerce Nirmala Sitharaman and the Revenue Secretary, as he had provided legal consultancy to Vodafone. Jaitley recused himself because he was the advocate for Vodafone and related companies before 2009.

From 2014 till 2017, the income tax authorities have put up a formidable battle before the Arbitration Tribunal. A senior Income Tax officer, on condition of anonymity, told PGurus that “it was almost certain that India was going to win the arbitration, the first and the biggest till date”. This case is the biggest tax dispute that the Income Tax department has got entangled in its history.

Apprehensive of tasting defeat in the arbitration under the Netherlands BIPA, in what is termed as a “devious” move, Vodafone moved for a fresh arbitration under the India-London BIPA.

The Income Tax authorities handling this matter have been absolutely against the idea of India being a party to the second arbitration in this case, especially when India was winning this case and the 3-year arbitration was coming to its logical end. A policy decision was made on file to ensure that the Dutch proceedings are expedited and that India will not participate in the second arbitration proceedings. Adhia made the decision on file of India not participating in the second arbitration, as proposed by Income Tax and Minister of State approved the proposal on file. The matter must have ended there.

A mystery note, signed by the Finance Minister (FM) Arun Jaitley surfaced, a copy of which is available with PGurus. The note addressed to a senior official in the Prime Minister’s Office (PMO), is also copied to Adhia. According to the note, “a formal colleague from the legal fraternity” advised the Finance Minister[3] regarding the poor performance of the Income Tax (IT) Department in the international arbitration proceedings and strongly recommended that India participate in the second arbitration proceedings. This is an intriguing and extremely strange development shrouded in conspicuous suspicion as the Finance Minister has represented the Vodafone in the past and this is a clear conflict of interest. Who is the legal colleague the Minister was referring to? Did he or she represent or provide legal consultancy to the Vodafone in the past? What about the idea of due diligence before the Government spends around Rs 100 crores a year on legal consultants and lawyers only for this issue? Though officially recused from the Vodafone files, Finance Minister Arun Jaitley later started pressurizing the PMO and argued in favor of new arbitration in London as suggested by the telecom giant3.

All decisions pertaining to the international arbitrations are made by the Inter-Ministerial Committee (IMC) consisting of officials from the Department of Economic Affairs (DEA), Law Ministry, Ministry of External Affairs (MEA) and the Revenue. Hasmukh Adhia chairs these meetings.

Adhia, having been “convinced” by the Minister of this new approach, swung into action and demanded the file in less than 48 hours. He did a U-turn and forced the Income-tax department also to follow suit.

Interestingly, the IT department put up a point-wise reply to the FM’s note with a copy of the rebuttal addressed to PMO. Sadly, Adhia suppressed this rebuttal note and never forwarded it to the PMO. This is an absolute indication of moral debauchery by Adhia because it is known fact that the PMO would not have allowed this course and also the wastage of hundreds of crore of public money. Did Adhia – because of his incompetence in the subject matter – not place all the facts before the Finance Minister?

All decisions pertaining to the international arbitrations are made by the Inter-Ministerial Committee (IMC) consisting of officials from the Department of Economic Affairs (DEA), Law Ministry, Ministry of External Affairs (MEA) and the Revenue. Hasmukh Adhia chairs these meetings. To follow his master’s directions, all ethics and moral principles were thrown out of the window by Adhia. Strange as it may sound, Adhia did not allow senior officers from any Ministry to participate in the IMC meeting to decide on this issue. Junior officers were deputed by the Ministries to make the crucial decisions on a Rs.40,000 crores tax dispute which will have ramifications in the other tax disputes that have been lined up in Cairn and Vedanta cases next. Is the PMO aware of this shoddy IMC and the pathetic performance led by Adhia on this issue? Ideally, all the three – Law, MEA, and DEA – ministries need to be pulled up for surrendering to Adhia and not doing their job in a diligent manner on such a major issue.

The Income Tax officer said, “Adhia records objections as the Head of Revenue Department in financial issues involving even a few lakhs. Why then throw hundreds of crore out of the window? Why not put up a strategic and tactical fight when what is at stake is not just Rs 40,000 crore but also India’s reputation in the first international tax arbitration it ever participated?”

Keeping the PMO in the dark, Adhia pulled off the show for the FM and pushed India into the second arbitration thereby opening up a Pandora’s box. Did Adhia act on his own volition or was he being his master’s voice? Did he realise that he was pulling the case from the jaws of success and putting at stake close to Rs 40,000 crores of public money? Is it not a colossal waste of money to be engaging counsels by paying them Rs 100 crore a year? Who are these counsels and who are the lawyers in the Lutyens Delhi who acted as middlemen and fixers in this deal? It is widely believed that being a lawyer, Jaitley’s opinion on engaging lawyers in London will have a value.

The Income Tax officer said, “Adhia records objections as the Head of Revenue Department in financial issues involving even a few lakhs. Why then throw hundreds of crore out of the window? Why not put up a strategic and tactical fight when what is at stake is not just Rs 40,000 crore but also India’s reputation in the first international tax arbitration it ever participated?”

Hasmukh Adhia needs to answer some critical questions in this regard –Firstly, why did he suppress the Income-tax note and keep the PMO in the dark?

Interestingly, the income tax officers did not give up. They went chasing behind the legal officers of the country. Adhia scuttled every move and did not take the opinion of the Attorney General or the Solicitor General on record. What followed is a series of awry moves that were soaked in an ego tussle between Income Tax and Adhia which has resulted in the entire matter going nasty and awry.

The Government faced a crushing defeat in High Court and then knocked the Supreme Court to take a call on the further course of the second arbitration. Things have come to such an outlandish pass that Vodafone is now ready to agree to club the two arbitrations into one. Long story in short is – India’s success was just snatched away in the last minute and a long and tiresome battle continues. It is a shame that the country’s best and the brightest who make up the Civil Services would deliberately botch prestigious international cases, for reasons best known to them.

It is our nation’s curse, said this income tax officer that domain experts and subject specialists are totally ignored & insulted and the decision making, like in this case, is placed in the hands of a generalist who neither has special knowledge in law, taxation nor arbitrations. “There is only one way in which the world will come to know about the nefarious designs that have been adopted by the Secretary Hasmukh Adhia, in compromising the Indian National Interest – place the relevant files in public domain. The files have an uncanny knack of speaking for themselves” said the officer.

Hasmukh Adhia needs to answer some critical questions in this regard –Firstly, why did he suppress the Income-tax note and keep the PMO in the dark? Secondly, is it true that he deliberately bamboozled senior officers from External Affairs, Economic Affairs and Law from participating in these Inter-Ministerial Committee meetings and insulted the Income-tax officers who are domain experts who did not agree with his views? Thirdly, why does Adhia still not reveal to anyone as to who was the “mysterious lawyer” who gave a note to the Finance Minister[4] which changed the tide in the Rs 40,000 crore dispute? Fourthly, did he deliberately mislead the Ministers of State (Finance) – Santosh Gangwar and Shiv Pratap Shukla and personally get these files signed from them? (it is a known fact in the Ministry of Finance that Adhia has utter contempt for all the Ministers of State (Finance) and does not keep them in the loop on any issue) Fifthly, is the “mysterious lawyer” a consultant to Vodafone? Sixthly, when there was an explicit direction from Arun Jaitley in June 2014 that in case of any dispute on the Vodafone arbitration issue, the matter must be referred to the Prime Minister, why did Adhia not escalate this to the PMO? Did he betray the Finance Minister in the process? Lastly, did Adhia keep the Prime Minister in the loop on this Rs.40,000 crore ($6.15 billion) issue which is expected to have very serious ramifications on the Cairn and Vedanta arbitrations also? Or did he unilaterally decide in his usual arrogant and devious style?

It is extremely unfortunate that Prime Minister India is being misled and let down by the dubious and devious actions of certain bureaucrats he reposes his faith and trust on. We only hope that the Prime Minister Narendra Modi is made aware of these nefarious designs at the earliest.

Note:

1. The conversion rate used in this article is 1 USD = 64.98 Rupees.

References:

[1] (Re)conciling the Vodafone-India tax dispute: the whirlwind isn’t stopping – Jul 12, 2013, BNA.com

[2] Vodafone case: Jaitley recuses himself from decisions – Jun 18, 2014, The Hindu

[3] Violating Conflict of interest Jaitley intervenes in Vodafone case – Jun 19, 2017, PGurus.com

[4] FM Arun Jaitley violates conflict of interest in the controversial Vodafone arbitration case – Sep 27, 2017, PGurus.com