International taxation issues didn’t come under the Bilateral Investment Promotion and Protection Agreement i.e., Bipa between India and the Netherlands as prescribed by the Inter-Ministerial Group (IMG), which met on 12/05/2012 to draft a response to Vodafone’s notice threatening international arbitration.

As per the Business Standards: “It was a preliminary meeting. Bipa provisions were read out… All ministries were of the view that taxation issues are not covered under the Bipa,” said a finance ministry official after the meeting, adding the money for the deal came from over 20 companies. The group, headed by Finance Secretary R S Gujral, will meet again next week. It has time till October to respond to the notice. The ministry may send its reply once the Finance Act is enacted.

The group also comprises secretaries of the Department of Economic Affairs, the law ministry, the telecom ministry and the external affairs ministry.

Last month, Vodafone served the notice as an investor defined under Article 1(d) of the treaty. Its Dutch subsidiary Vodafone International Holdings BV served the notice, asking the government to abandon or amend retrospective aspects of the proposed Finance Bill 2012 or face arbitration proceedings.

Officials said the Bipa specifically excludes Vodafone-like tax transactions and that taxation issues are dealt with separately under Double Taxation Avoidance Agreements.

The provisions of the treaty states “in respect of grant of national treatment and most favoured nation treatment shall not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation”.

Vodafone, however, had stated, “The treaty explicitly applies to indirect investments and our transaction is therefore clearly one which qualifies for Treaty protection.”

The detailed reply may also include other arguments stating why the Bipa could not be invoked in this case. The finance ministry has also argued that the deal was signed in Cayman Islands, and did not bring any foreign direct investment into India.