The Indian unit of UK-based telecom giant Vodafone Group Plc has got a major relief from Bombay High Court on a transfer pricing dispute with Indian tax authorities.
By Subhash Narayan
This could help the company to avoid payment of additional tax demanded by the income tax department which added Rs 3,200 crore to its taxable income in a case relating to sale of shares by Vodafone India Services to parent company in FY10.
Hearing the case Bombay High Court on Friday ruled in favour of the company suggesting that there was no taxable income on share premium received on the issue of shares.
The judgment is expected to set the precedent for other transfer pricing cases being looked at by the court involving companies such Shell India and Leighton. Both have also approached the court against similar tax demand raised by the tax department. The court has bunched these cases together with an order on Shell case expected on Monday.
According to analysts, the decision also bodes well for about two dozen other companies such as Havells, HSBC Securities, Patel Engineering, Bharti Telecom, Essar Group. Other multinationals involved in tax disputes in India include IBM, Nokia, Sanofi, WNS Holdings.
The Vodafone case relates transfer pricing orders passed against the company as the authorities alleged that shares transferred by the Indian firm to its parent (at a premium) were undervalued. This, as per tax department’s assessment, meant that the company avoided paying tax even though the income generated from such transfer was much higher.
The tax authority issued a show-cause notice to Vodafone India on 17 January before passing the order making the addition of Rs 3,200 crore to its domestic taxable income. On 27 January, Vodafone moved the Bombay High Court seeking relief from the I-T show-cause notice.
Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.
Vodafone has argued in court that its transaction is not taxable under the Indian tax laws. This has now been accepted by the high court.
The decision is a setback for the tax department that has claimed share sale by a subsidiary to its parent as income that needs to be taxed.
It is general practice among multinationals to fund its subsidiary by subscribing to its share at a premium. This is typically viewed as a capital transaction and out of the transfer pricing net.
But I-T department thought otherwise.
This is not the first time that Vodafone has challenged a transfer pricing tax order. The firm has taken the tax authority to high court over two other transfer pricing orders that raised a demand of Rs 3,700 crore and Rs 400 crore on Vodafone India. Both cases are pending in the Bombay high court.
Vodafone is also engaged in arbitration with the Indian government over I-T department’s Rs 11,000 crore tax demand in a 2007 case involving Vodafone International Holdings BV buying the Indian business operations of Hutchison Telecommunications International Ltd.