Bombay high court rules in favour of Vodafone in transfer pricing case

Mumbai: The Bombay high court on Friday ruled in favour of the Indian subsidiary of Vodafone Group Plc in a case relating to addition of about Rs.3,200 crore to the taxable income of Vodafone India Services Pvt. Ltd for fiscal year 2009-10 by the tax department. A division bench of chief justice Mohit Shah and justice M.S. Sanklecha said, “We feel that there is no taxable income on share premium received on the issue of shares.” Foreign investors have been concerned about a raft of tax demands raised by the income-tax department, alleging underpayment of tax. Apart from Vodafone India , Shell India Markets Pvt. Ltd and Leighton India Contractors Pvt. Ltd have also moved the court against similar show-cause notices and transfer pricing orders of the I-T department. All the cases have been bunched together. An order in the case of Shell India will be pronounced on Monday. Experts said there are over 20 firms such as Bharati Telecom, two Essar Group firms, HSBC Securities, Patel Engineering Ltd and Havells India Ltd that are contesting similar transfer pricing tax orders. The transfer pricing orders passed against Vodafone stems from the alleged undervaluation of the shares issued by the Indian firms to their parent companies. The tax authority issued a show-cause notice to Vodafone India on 17 January before passing the order making the addition to its domestic taxable income. Vodafone India had on 22 January written to the tax officer requesting him to “decide the preliminary issue about jurisdiction whether or not any income arises or any potential income arises or is effected by issue of shares.” The firm had also asked to extend its deadline for filing a reply to the show-cause notice. On 27 January, Vodafone India moved the Bombay high court seeking relief from the I-T show-cause notice, fearing a tax demand order which was issued on 29 January. 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. Harish Salve, senior counsel representing Vodafone, said, “Share premium received on issue of shares is never taxable.” Salve also said that the tax authority’s action is a “blatant attempt to tax hypothetical or non-existent income”. Funding a subsidiary by issuing shares is a common practice among multinational companies, which they typically view as a capital transaction and out of the transfer pricing net. The I-T department, however, disputes this claim. 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 tax 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. In 2007, Vodafone International Holdings BV, a Dutch unit of the British telecom firm, bought the Indian business operations of Hutchison Telecommunications International Ltd through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of Hutchison, in a $11 billion deal. The Indian tax department estimated the company’s liability at around Rs.11,000 crore for not withholding a part of the amount as tax while paying Hutchison. In 2012, the Supreme Court ruled in favour of Vodafone and held that the deal was not taxable in India. To counter this, the government introduced a retrospective amendment to laws to bring such indirect transfers of shares under the tax net. It also introduced a validation clause that effectively made Vodafone liable to pay tax in India, sparking large-scale protests from the investor community. Currently, Vodafone and the government are locked in an arbitration over the issue. Besides Vodafone and Shell, other multinational companies recently involved in tax disputes in India include International Business Machines Corp. (IBM), Nokia Oyj, Sanofi SA and WNS (Holdings) Ltd. All these cases are a fallout of the retrospective amendments introduced in the Union budget of 2012.