Transfer pricing case: Vodafone gets relief from Bombay HC

The court overruled the order of Income Tax Appellate Tribunal issued last year suggesting that the income tax dept has jurisdiction in this dispute

Mumbai: The Bombay high court on Thursday ruled in favour of the Indian arm of Vodafone Group Plc. in a Rs.8,500 crore transfer pricing tax dispute.

The verdict augurs well for other foreign companies locked in similar disputes with the Indian tax department, including Royal Dutch Shell Plc., International Business Machines Corp. and Nokia Oyj.

The high court overruled an order by the Income Tax Appellate Tribunal (ITAT) issued last year that the tax department has the jurisdiction in the transfer pricing tax case involving the sale of Vodafone’s call centre business to Hutchison Whampoa Properties and assignment of call options to Vodafone International Holdings BV in 2007-08.

The tribunal’s ruling came in response to a plea by Vodafone India Services Pvt. Ltd challenging the jurisdiction of the tax department in issuing the December 2011 order that sought to add Rs.8,500 crore to its taxable income in fiscal year 2007-2008. In 2013, the tax department claimed tax of Rs.3,700 crore from Vodafone India in this case.

Transfer pricing is the value at which different units of the same company conduct cross-border trade in products, services or assets. It refers to the practice of arm’s length pricing for transactions between group companies to ensure that a fair price—one that would have been charged to an unrelated party—is charged.

Vodafone has maintained that the transaction is not an international transaction and so it does not attract tax.

“Vodafone welcomes today’s decision by the Bombay high court,” a Vodafone spokesperson said without elaborating.

Fereshte Sethna, the lawyer representing Vodafone, said that the tax demand on the telecom company falls away with this verdict, although it is too early to say if the matter has been buried once and for all.

The government of Prime Minister Narendra Modi, which has pledged to bring stability and predictability to the tax regime, said in January that it wouldn’t file an appeal in an earlier case that had gone in Vodafone’s favour. High-profile tax disputes have tarnished India’s image as an investment destination.

“Ideally, the matter should be buried once and for all. But obviously the other parties will take a view based on legal opinion,” said Sethna.

The finance ministry will study the Bombay high court order and then decide on its future course of action, revenue secretary Hasmukh Adhia said.

Last month, the Press Trust of India cited finance minister Arun Jaitley as saying that the government was keen on an early resolution of pending tax disputes involving Vodafone, Cairn Energy Plc. and Shell.

“The resolution can be by way of judicial tribunals, by way of discussions within or by way of some other methods that we have used in other cases,” Jaitley was quoted as saying. “But I am certain (it will be resolved), because it is necessary to resolve these issues as tax uncertainty does not help the investment environment and therefore, we want the entire instability over the taxation matters to be expeditiously resolved,” the finance minister had said.

Bhairav Kothari, managing director at financial advisory and consulting firm SuperCFO Services Pvt. Ltd, welcomed the judgement. “It needs to be seen if the department abstains from appealing this in the Supreme Court. Investors globally are tracking this case and if the government takes a fair approach, it will immensely help the ‘Make in India’ movement of the government,” Kothari, who was instrumental in several cross-border deals in the capacity of chief financial officer for his previous organizations, said.

The Union cabinet in January also decided not to appeal adverse lower court rulings in similar transfer pricing cases, a move which will bring respite to other companies, such as the Indian arm of Royal Dutch Shell, that are involved in disputes with the tax department.

The cabinet’s decision followed advice given by the attorney general of India, Mukul Rohatgi, who advised against appealing the Bombay high court judgement in the case involving Vodafone.

The Bombay high court on 10 October 2014 ruled in favour of Vodafone India Services. In that case, the company was accused by the tax department of under-pricing shares in a rights issue to the parent firm in 2009-10.