The Law Ministry has said the Income-Tax Act does not allow for resolution of disputes outside the Act, sources told NDTV.
Vodafone, which is facing a tax liability of Rs 11,200 crore for the purchase of Hutchison Whampoa's stake in its Indian telecom business Hutchison Essar in 2007, had written to the Finance Ministry seeking a settlement of the tax issue.
The tax department had issued a letter in January to Vodafone International Holdings, stating that the company is required to pay a tax demand of about Rs. 11,217 crore besides interest.
However, Vodafone responded saying it did not owe anything to the Indian government. The company had earlier wanted to take India to international arbitration, but after discussions with the Indian government it offered conciliation on the matter.
The Vodafone tax controversy stoked up after the Supreme Court, on January 20, 2012, set aside a Bombay High Court judgement asking Vodafone International to pay an income tax of Rs. 11,000 crore on the Hutchison deal.
The Supreme Court's order was seen as a victory for Vodafone. The Supreme Court also directed the tax department to return the Rs. 2,500 crore deposited by Vodafone in compliance with an interim order.
This did not go down well with the government, and the-then Finance Minister Pranab Mukherjee amended the Income-Tax Act, 1961, with retrospective effect to undo the Supreme Court's judgement.
Following this, international and domestic investors began to raise concerns about investing in India, which led the government to appoint a committee under tax expert Parthasarthi Shome to look into the issue. The Shome committee suggested that either the government withdraw the retrospective tax amendment or waive the penalty.
Earlier this month, sounding confident of finding a way out on the case, Finance Minister P Chidambaram reiterated that the final call on the British telecom firm's offer of conciliation would be taken by the Cabinet.
"Unless we resolve the Vodafone case, I can't go to Parliament with the amendments to the retrospective clause," he told NDTV's Vikram Chandra and Shweta Rajpal Kohli in an exclusive interview.