Finance Minister Arun Jaitley violates conflict of interest in the controversial Vodafone arbitration case

On a day when the news of three senior Income Tax Commissioners – Sunil Kumar Ojha, Manas Shankar Ray, and Subhash Chandra – being investigated by the CBI Central Bureau of Investigation linking with payouts with Congress leader Ahmed Patel’s son-in-law Irfan – is making the rounds, there is more damaging news emanating from the Ministry of Finance.

The twists and turns in the story started with the note that was signed by the Finance Minister himself.

PGurus had reported on June 19, 2017, about a note that the Finance Minister Arun Jaitley had sent to the Principal Secretary to the Prime Minister with a copy to the Revenue Secretary and Defence Secretary on certain International arbitrations in which India is participating. Vodafone case, under the India – Netherlands Investment agreement is one such dispute.

Vodafone case is the biggest tax battle of the Income Tax Department (IT) till date. After losing the case, the Government had legislated a retrospective tax law and involved revenue of around Rs.30,000 crores ($4.66 billion) for its controversial takeover in 2006.

Interestingly, the note written by the Finance Minister to the Principal Secretary and the Secretaries of Revenue and Defence speaks about “a formal colleague from the legal fraternity”. It remains a mystery as to who this colleague is and whether the said invisible lawyer bats for the interests of the revenue and what is his or her locus standi in this issue. The story began there.

The chaos in the Income Tax Department was pretty evident when after having decided not to participate in the abuse process, they filed an application before the Delhi High Court to seek an injunction.

According to a senior IT official, the Government had decided to not appoint an arbitrator in the tax abuse process initiated by the Vodafone through a second tax arbitration under the India – UK BIPA. Vodafone is now losing the case in Netherlands forum and cleverly doing another case in United Kingdom forum.

The twists and turns in the story started with the note that was signed by the Finance Minister himself. The Income Tax Department apparently did a 180-degree turn. The senior IT official, who was not part of the proceedings, on strict condition of anonymity, said “it has been the most guarded secret of the IT department these days as to on who’s advice did the Revenue make decisions on this issue. It is significant not just because it involves Rs 30,000 crores but importantly so, as this sets a precedent for any tax abuse process in the future”

The chaos in the Income Tax Department was pretty evident when after having decided not to participate in the abuse process, they filed an application before the Delhi High Court to seek an injunction. Justice Manmohan restrained Vodafone or its subsidiaries from going ahead with arbitration under the India-UK Bilateral Investment Protection Agreement (BIPA) as the telecom major had initiated similar proceedings on the same issue under the India-Netherlands BIPA.

In an interim order, the Court said, “This court is of the prima facie view that in the present case, there is a duplication of the parties and the issues. In fact, the relief sought by the defendants under the India-UK BIPA and by the Vodafone International Holdings BV (VIHBV), the subsidiary of defendants (Vodafone group), under the India-Netherlands BIPA are virtually identical. This court is further of the prima facie view that there is a risk of parallel proceedings and inconsistent decisions by two separate arbitral tribunals in the present case. In the prima facie opinion of this Court, it would be inequitable, unfair and unjust to permit the defendants to prosecute the foreign arbitration.”

The Finance Minister Arun Jaitley had in 2014 recused himself from handling any issue or file pertaining to the Vodafone case. Arun Jaitley did that because he, as an advocate before 2009 had represented Vodafone.

One would have believed that this would have been the end of the matter. Or so, till the High Court finally decides on this issue. But the “former colleague” of Arun Jaitley “from the legal fraternity” was relentless and in no mood to give up.

The Government of India, in what may appear like a contempt of the proceedings before the High Court of Delhi, went ahead and has appointed an Arbitrator under the India – UK Bilateral Agreement to initiate proceedings, in what it had previously termed the “abuse process”.

The senior Income tax official further added that it is very intriguing that the Department chose not to seek the legal opinion of the Attorney General K K Venugopal, who is a learned legal luminary. Also, the tax department has gone ahead with this major decision without seeking the opinion of the Law Ministry or the Solicitor General or any other law officer of the Government.

The Finance Minister Arun Jaitley had in 2014 recused himself from handling any issue or file pertaining to the Vodafone case. Arun Jaitley did that because he, as an advocate before 2009 had represented Vodafone. However, in the present instance, the Revenue Department has gone against the order of the High Court to appoint an arbitrator and that too, without seeking the advice of the AG, SG or the Law Ministry based on the legal advice couched in the Finance Minister’s note.

Several questions come up:

1. Who is this advocate who had given this note to the Finance Minister Arun Jaitley?
2. Why were the Income Tax officials forced to seek an opinion from this “unknown advocate”?
3. Why was there a U-turn in the decision of the Revenue Department after this note surfaced from the Finance Minister’s office?
4. Why did the Government not seek the AG, SG or the Law Ministry’s opinion on such an important issue?
5. Why was the order of the High Court not adhered to in letter and spirit?
6. Why has the Government changed its stance that this is a tax abuse process?
7. How will we now deal with international arbitration if each of these companies file multiple arbitrations under different bilateral investment agreements? Has a precedent been set?

And the most important of all – why did the Finance Minister Arun Jaitley who recused himself in the case in 2014 is now back in the driver’s seat dictating terms as to how this tax arbitration must be handled? Is this not a conflict of interest? And should it not be made public as to who is this mysterious advocate who is deciding on the matter involving thousands of crores of public money?

Finally, this note of the Finance Minister Arun Jaitley was addressed to the Principal Secretary to the Prime Minister, Nripendra Misra. Is the PMO in the loop on this decision?

This entire arbitration process will cost at least Rs 100 crore a year and usually goes on for many years. The simple question is – why should the tax payer’s money be spent on the basis of some ill-conceived advice of unknown advocate who knows the FM? Someone needs to answer – where does the buck stop? The nation wants to know.

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